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Originally Posted by LavrentiBeria
What the hell is the Shadow Banking system? Never heard of it before
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Also referred to as "Dark Pools" [of capital], they are unregulated and over-the-counter bilateral contracts that constitute a large part of current global trade. Because they are so opaque and without oversight, they pose a huge risk to the global financial system. It has been suggested that our current crisis is really the unwinding of these dark pools. And since no one knows how large the system has become, that uncertainty is adding to the daily volatility in the markets and to Bernanke and Paulson's panicked urgency for govt intervention.
One of the best articles I've read on the subject, written in July before the crisis began (very good):
Are "Dark Pools" Destined to be the Capital Markets' Next Black Hole?
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Dark Pools are electronic "crossing networks" that offer institutional investors many of the same benefits associated with making trades on the stock exchanges’ public limit order books - without tipping their hands to others, meaning publicly quoted prices aren’t affected. This is the capital markets’ version of a godsend - especially for traders who desire to move large blocks of shares without the public investors ever knowing.
Some examples of so-called crossing networks include Liquidnet Inc., Pipeline, the Posit unit of Investment Technology Group (ITG), or the SIGMA X unit of Goldman Sachs Group Inc. (GS).
In an era in which "secret" transactions contributed to what’s shaping up to be the largest credit crisis in history, you’d think that any mechanism that allows insiders to trade in complete secrecy and with total anonymity would be scrutinized more closely than a Roger Clemens vitamin shot. But that’s not the case with Dark Pools.
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It goes on to list some of these private exchanges.
