Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence and Your Portfolio

254 Pages·2012·2.62 MB·English

by  Sal L. Arnuk

Broken Markets
How High Frequency Trading and
Predatory Practices on Wall Street
Are Destroying Investor Confidence and
Your Portfolio
Sal Arnuk
Joseph Saluzzi
Vice President, Publisher: Tim Moore Associate Publisher and Director of
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© 2012 by Sal Arnuk and Joseph Saluzzi Publishing as FT Press
Upper Saddle River, New Jersey 07458
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Printed in the United States of America First Printing May 2012
ISBN-10: 0-13-287524-1
ISBN-13: 978-0-13-287524-0
Pearson Education LTD.
Pearson Education Australia PTY, Limited.
Pearson Education Singapore, Pte. Ltd.
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The Library of Congress cataloging-in-publication data is on file.
We dedicate this book to the executives at the
major U.S. stock exchanges, to high frequency
trading firms, to lobbyists, and to numerous other
conflicted parties in Washington, D.C., and Wall
Street. Without your actions, we would never have
become outraged enough to write this book.
Contents
Foreword by Former U.S. Senator Ted Kaufman
Introduction
Chapter 1 Broken Markets
Why Has Our Stock Market Structure Changed So Drastically?
When Did HFT Start?
How Did HFT Become So Big?
Why Have We Allowed This to Happen?
Will There Be Another Market Crash?
Where’s the SEC in All This?
Endnotes
Chapter 2 The Curtain Pulled Back on High Frequency Trading
What Is High Frequency Trading, and Who Is Doing It?
Market Making Rebate Arbitrage
Statistical Arbitrage
Market Structure and Latency Arbitrage
Momentum Ignition
How the World Began to Learn About HFT
The SEC’s Round Table on Equity Market Structure—or Sal Goes to
Washington
60 Minutes—or Joe Makes It to Primetime
Endnotes
Chapter 3 Web of Chaos
NYSE and the Regionals
NASDAQ
SOES
Instinet
Problems for NYSE and NASDAQ
Four For-Profit Exchanges
Conflicts of Interest
Fragmentation
The Tale of the Aggregator
Endnotes
Chapter 4 Regulatory Purgatory
Early 1990s Change in Regulations
Late 1990s Regulations—Decimalization, Reg NMS, and
Demutualization
Early 2000s—Reg NMS
Endnotes
Chapter 5 Regulatory Hangover
The Flash Order Controversy
The Concept Release on Market Structure...Interrupted
The Band-Aid Fixes
Endnotes
Chapter 6 The Arms Merchants
Colocation
Private Data Feeds
Rebates for Order Flow (The Maker/Taker Model)
Not Your Father’s Stock Exchange
Endnotes
Chapter 7 It’s the Data, Stupid
Information for Sale on Hidden Customer Orders
Data Theft on Wall Street
The Heat Is On
Phantom Indexes
Machine-Readable News
Who Owns the Data?
Endnotes
Chapter 8 Heart of Darkness
The Birth of Dark Pools
Dark Pools Cross Over...to the Dark Side
How HFT Internalization in Dark Pools Hurts Investors
How Latency Arbitrage in Dark Pools Hurts Investors
What Else Is Being Done to Stop Dark Pool Abuse?
Endnotes
Chapter 9 Dude, Where’s My Order?
How Algorithms Work: Making the Sausage
How a Smart Order Router (SOR) Works: Regrinding the Sausage
Complex by Design: What Would Major Do?
Endnotes
Chapter 10 The Flash Crash
Deregulation
Critics
This Is the New Marketplace
Endnotes
Chapter 11 The Aftermath
The Joint Committee Weighs In
The Abyss of Destruction
Endnotes
Chapter 12 Killing the Stock Market That Laid the Golden Eggs
Reversal of Fortune
The Window Is Open! Oops! The Window Is Shut!
Winds of Change?
A Blueprint for Effective Stock Markets
Alternative Views
The Case for Higher Cost Markets: The Stock Market Toll Paradox
Give Issuers Control over Their Tick Sizes
Call for a New Parallel Stock Market
Endnotes
Chapter 13 Call to Action
We Are Not Alone
There Is an Alternative
Fight for Your Rights
Raise Your Voice
Repair Our Broken Markets
Endnotes
Appendix Themis Trading White papers
Index