A quick follow-up on an earlier post in which I said I was going to read Scott Patterson’s Dark Pools: High-Speed Traders, A.I. Bandits, and the Threat to the Global Financial System. I have finished the book and would recommend it highly to anyone who is actively involved in today’s equity markets. Patterson’s book really does read more like a thriller than it does a treatise on financial market structure.
That being said it is hard to come away from the book with much in the way of optimism for ability of today’s exchanges to serve the average investor. Patterson does a great job showing how the early origins of electronic trading quickly evolved into the highly complex, highly interconnected markets which we have today. Which would be all well in good if the exchanges themselves weren’t so dependent on the traffic from high frequency traders. It is the catering to these traders through specialized order types which has made the markets in a very certain fashion unfair and “toxic.”
Toward the end of the book, Patterson notes the irony of the failed IPO of BATS Global Markets. Since the book went to print, the Facebook IPO also showed the tenuous structure of today’s markets. One can only hope that these two incidents are the start of some sort of return to exchanges where the purpose is to bring willing sellers and buyers together in a transparent fashion, not one in which the business model is built on the maker-taker model of payments to the computer co-located at the exchange.
I wasn’t planning to, but now am adding Sal Arnuk and Joseph Saluzzi’s Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence and Your Portfolio to the reading list.