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

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The markets have evolved at breakneck speed during the past decade, and change has accelerated dramatically since 2007's disastrous regulatory "reforms." An unrelenting focus on technology, hyper-short-term trading, speed, and volume has eclipsed sanity: markets have been hijacked by high-powered interests at the expense of investors and the entire capital-raising process. A small consortium of players is making billions by skimming and scalping unaware investors -- and, in so doing, they've transformed our ...

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

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Overview

The markets have evolved at breakneck speed during the past decade, and change has accelerated dramatically since 2007's disastrous regulatory "reforms." An unrelenting focus on technology, hyper-short-term trading, speed, and volume has eclipsed sanity: markets have been hijacked by high-powered interests at the expense of investors and the entire capital-raising process. A small consortium of players is making billions by skimming and scalping unaware investors -- and, in so doing, they've transformed our markets from the world's envy into a barren wasteland of terror.

Since these events began, Themis Trading's Joe Saluzzi and Sal Arnuk have offered an unwavering voice of reasoned dissent. Their small brokerage has stood up against the hijackers in every venue: their daily writings are now followed by investors, regulators, the media, and "Main Street" investors worldwide. Saluzzi and Arnuk don't take prisoners! Now, in Broken Markets, they explain how all this happened, who did it, what it means, and what's coming next. You'll understand the true implications of events ranging from the crash of 1987 to the "Flash Crash" -- and discover what it all means to you and your future. Warning: you will get angry (if you aren't already). But you'll know exactly why you're angry, who you're angry at, and what needs to be done!

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Product Details

  • ISBN-13: 9780132875240
  • Publisher: FT Press
  • Publication date: 6/7/2012
  • Edition number: 1
  • Pages: 336
  • Product dimensions: 6.20 (w) x 9.10 (h) x 1.20 (d)

Meet the Author

Sal Arnuk is partner, cofounder, and co-head of equity trading of Themis Trading, LLC, a leading independent agency brokerage firm that trades equities for institutional money managers and hedge funds. Arnuk has extensive experience in equities trading and is an expert in electronic trading and market structure. Prior to founding Themis in 2002, he was with Instinet Corporation, where he headed the team responsible for equity sales and trading for institutional money managers, for more than 10 years.

His opinions are sought by leaders, regulators, market partici-pants, and the media and are presented via white papers and Themis’ widely read blog. He is a frequent speaker at industry conferences, such as Trader Forum, Waters, National Organization of Investment Professionals (NOIP), and Fusion IQ’s Big Picture, on issues involving market access, algorithmic trading, and other sell- and buy-side concerns.

He also provides expert commentary for media outlets such as the Associated Press, BBC Radio, Bloomberg TV and Radio, BNN, CNBC, Fox Business, NPR, Barron ’s, The New York Times, The Wall Street Journal, USA Today, Time, Los Angeles Times, Bloomberg News, Pensions & Investments, and Advanced Trading.

Arnuk earned an MBA in finance from New York University’s Stern School of Business and a Bachelor’s degree in finance from SUNY Binghamton University.

Joseph Saluzzi is partner, cofounder, and co-head of equity trading of Themis Trading, LLC. Saluzzi has extensive experience in equities trading and is an expert in electronic trading and market structure. Prior to Themis, he headed the team responsible for equity sales and trading for hedge fund accounts at Instinet Corporation for more than 9 years.

Saluzzi has provided analysis to regulators, including the Securities and Exchange Commission and as a member of the Commodity Futures Trading Commission’s new Subcommittee on Automated and High Frequency Trading.

He has appeared or been quoted on market structure issues by media outlets such as CBS’s 60 Minutes, BBC Radio, Bloomberg Television and Radio, CNBC, Fox Business, BNN, The New York Times, The Wall Street Journal, USA Today, Reuters, Associated Press, Los Angeles Times, and Bloomberg News. Saluzzi also has authored articles for Traders Magazine, Dow Jones, Journal of Investment Compliance, and Journal of Indexes.

He earned an MBA in finance from the University of North Caro- lina at Chapel Hill and a Bachelor’s degree in finance from New York University.

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Table of Contents

Foreword Former U.S. Senator Ted Kaufman x

Introduction 1

Chapter 1 Broken Markets 7

Why Has Our Stock Market Structure Changed So Drastically? 9

When Did HFT Start? 10

How Did HFT Become So Big? 13

Why Have We Allowed This to Happen? 14

Will There Be Another Market Crash? 16

Where's the SEC in All This? 18

Endnotes 21

Chapter 2 The Curtain Pulled Back on High Frequency Trading 23

What Is High Frequency Trading, and Who Is Doing It? 24

Market Making Rebate Arbitrage 26

Statistical Arbitrage 28

Market Structure and Latency Arbitrage 30

Momentum Ignition 32

How the World Began to Learn About HFT 34

The SEC's Round Table on Equity Market Structure-or Sal Goes to Washington 36

60 Minutes-or Joe Makes It to Primetime 40

Endnotes 42

Chapter 3 Web of Chaos 45

NYSE and the Regionals 48

NASDAQ 49

SOES 50

Instinet 52

Problems for NYSE and NASDAQ 54

Four For-Profit Exchanges 56

Conflicts of Interest 58

Fragmentation 60

The Tale of the Aggregator 62

Endnotes 65

Chapter 4 Regulatory Purgatory 67

Early 1990s Change in Regulations 68

Late 1990s Regulations-Decimalization, Reg NMS, and Demutualization 72

Early 2000s-Reg NMS 76

Endnotes 80

Chapter 5 Regulatory Hangover 83

The Flash Order Controversy 84

The Concept Release on Market Structure… Interrupted 87

The Band-Aid Fixes 90

Endnotes 94

Chapter 6 The Arms Merchants 97

Colocation 99

Private Data Feeds 101

Rebates for Order Flow (The Maker/Taker Model) 104

Not Your Father's Stock Exchange 107

Endnotes 108

Chapter 7 It's the Data, Stupid 111

Information for Sale on Hidden Customer Orders 113

Data Theft on Wall Street 115

The Heat Is On 117

Phantom Indexes 120

Machine-Readable News 121

Who Owns the Data? 123

Endnotes 124

Chapter 8 Heart of Darkness 125

The Birth of Dark Pools 127

Dark Pools Cross Over…to the Dark Side 130

How HFT Internalization in Dark Pools Hurts Investors 132

How Latency Arbitrage in Dark Pools Hurts Investors 133

What Else Is Being Done to Stop Dark Pool Abuse? 136

Endnotes 138

Chapter 9 Dude, Where's My Order? 141

How Algorithms Work: Making the Sausage 143

How a Smart Order Router (SOR) Works: Regrinding the Sausage 145

Complex by Design: What Would Major Do? 148

Endnotes 150

Chapter 10 The Flash Crash 151

Deregulation 154

Critics 159

This Is the New Marketplace 162

Endnotes 173

Chapter 11 The Aftermath 177

The Joint Committee Weighs In 182

The Abyss of Destruction 187

Endnotes 191

Chapter 12 Killing the Stock Market That Laid the Golden Eggs 195

Reversal of Fortune 200

The Window Is Open! Oops! The Window Is Shut! 203

Winds of Change? 204

A Blueprint for Effective Stock Markets 205

Alternative Views 208

The Case for Higher Cost Markets: The Stock Market Toll Paradox 211

Give Issuers Control over Their Tick Sizes 212

Call for a New Parallel Stock Market 213

Endnotes 214

Chapter 13 Call to Action 217

We Are Not Alone 219

There Is an Alternative 220

Fight for Your Rights 223

Raise Your Voice 226

Repair Our Broken Markets 229

Endnotes 230

Appendix Themis Trading Whitepapers 233

Index 289

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