Broadening the Debate on HFT & Market Structure

As traders, the fact that we wrote a book that has gained attention and accolades is exciting and humbling.  We’d be less than candid if we didn’t acknowledge that we had a lot of help putting together Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio (see web site here as well)   To all of you, and you know who you are, thank you very much.

As anybody who has written a book will tell you, it is not easy, particularly if it’s the first.  We were anxious every step of the way.  What approach should we take?  How should we organize it?  Have we thoroughly documented our theories and facts?  What if we get something wrong?

We are happy to report that it all turned out OK.  The HFT crowd wasn’t too pleased, but they didn’t come up with anything new to refute what we wrote.  All they could say was more of the same:  “Technology is good…Speed is even better…Joe and Sal are wrong…”  The vast majority of reviewers, readers, Wall Street executives, regulators and legislators got it.  As of December 18^th, the book was in Amazon’s Top 100 Best Sellers in the “economics” category.

Major Reviews & Comments

In his review, Jim McTague, Washington Editor of Barron’s, wrote, “Every time you buy or sell a stock, your pocket is being picked by the most sophisticated group of scoundrels ever to frequent that notorious clip joint known as Wall Street. If it were not for the two astute traders who wrote this breezy, instructive, and, ultimately, infuriating book, few of us would be any wiser.”  Click here for more.

Nathaniel Popper, in a lead New York Times Sunday Business Section feature on us, wrote how our point of view was “gaining more traction with industry insiders. The head of the New York Stock Exchange said this summer that the pursuit of speed had gone too far. In debates with Mr. Saluzzi, some H.F.T. executives have agreed that the fragmentation of the markets is now doing more harm than good for investors.”  Click here for more.

Within our industry, Tom Steinert-Threlkeld, editor-in-chief of Securities Technology Monitor, named Broken Markets one of the “12 Great Trading Books for the Holidays.”  He wrote, “Arnuk and Saluzzi go to great length to show how smart, sophisticated and automated traders are taking money out of the pockets of trusting or unsuspecting individual and institutional investors.”  Click here for more.

Martin Fridson, who the New York Times once called “one of Wall Street’s most thoughtful and perceptive analysts,” reviewed Broken Markets for the CFA Institute.  “The authors have already helped bring about limited reform by casting light on questionable practices,” he opined. “Wider dissemination of their message could build upon that progress.”  Click here for more.

Jim Kim, editor-in-chief of FierceFinance, noted, “It may not be long before retail investors hail Saluzzi and Arnuk as heroes, champions of the little guys. They will not likely be comfortable in the spotlight, but you have to admire their willingness to take on the powers, even if you do not agree with them.”  Click here for more.

Joshua M. Brown, writing for Huffington Post, named us one of “The 25 Most Dangerous People in Financial Media.”  He explained, “Joe Saluzzi and Sal Arnuk are… far and away the foremost critics of HFT. Their new book Broken Markets will surprise you with the picture of modern trading that it paints.”  Click here for more.

Continued “Bimbo Eruptions” on Wall Street

Much of the favorable reaction was fueled by continued HFT “bimbo eruptions” on Wall Street.  In March, there was the failed BATS IPO, and in May, there was the Facebook IPO, which gave new meaning to the term SNAFU.  Later in May, JP Morgan lost $2 billion in the “London Whale” trading scandal, and in August, Knight lost $440 million when it was “algo trading gone wild”.

This fall we had “The Equity Order Type Controversy,” when it was revealed that all kinds of high-tech order routing processes provided by stock exchanges help manipulate orders so it is easier for HFT firms to scalp them.  Now, instead of just being concerned about market structure, you had to be concerned about market microstructure.

First Authors, Now Speakers

As a result of all this, a variety of organizations began to seek us out.  They wanted us to explain HFT, how it works, and how it is “hollowing out” our equity markets, similar to the way Chinese companies have hollowed out American manufacturing.

The Commodity Futures Trading Commission invited Joe to join a subcommittee to help the agency grapple with HFT.

We spoke at conferences, such as Finance Watch in Brussels, United Nations Principles for Responsible Investment Webinar, National Investor Relations Institute Southwest Regional Conference, SAP Financial Services Forum, Securities Traders Association of Dallas, and CFA Society of Austin.

By December, it was clear we had accomplished one of our primary goals in writing the book. That was broadening the debate.  As we wrote on page 4:

“The discussion and debate around the workings of our capital raising superhighway needs to be had by the much larger and more mainstream stakeholders: investors.

“For too long, the HFT and market structure debates have been monopolized by a small group of industry insiders, regulators, and group thinkers. In the process, our markets have morphed into an insanely complex web of conflicted stock exchanges, dark pools, alternative trading systems (ATSs), and liquidity providers.

“We want to call attention to these conflicts and issues more broadly. We want you to understand how our markets actually work and why they morphed the way they have.

“It was no accident.”

Thank you again, everyone.  Here’s to 2013 — hopefully a year when reason will return to our markets.