What a tale.
I'll admit, I still don't have a firm grasp of how it all went down. There are Russian programmers, dudes laying pipe for cables, the biggest Wall Street firms, and a host of other characters. They took a system, computerized it, and then, like the slots in Las Vegas, rigged the system so they could reap the profits and minimize the risk only to themselves. And no one really wanted to do anything about it because, hey, when you're having the most fun at the party, why turn the lights on.
After finishing, I suggested to Darr that we move our retirement fund to the Royal Bank of Canada because the guys working there really are nicer up there. They believe in the system working fairly for all participants, not just the high-frequency traders. To their credit, those guys admitted the value of high-frequency traders. They recognized the place HFTs could have in the system, but they also realized the need for a system that allowed them to play without letting them have an advantage that created an unfair playing field for everyone else. (They were essentially legally ripping off the very investors they were working for. Tsk, tsk.)
The Puzzle Masters* spent days working through the many order types. All of them had one thing in common: They were designed to create an edge for HFT at the expense of investors…"[With] every rock we turned over, we found a disadvantage for the person who was actually there to trade." Their purpose was to hardwire into the exchange's brain the interests of high-frequency traders–at the expense of everyone who wasn't a high-frequency trader. -pg 171
"Electronic front-running"–seeing an investor trying to do something in one place and racing him to the next…"Rebate arbritage"–using the new complexity to game the seizing of whatever kickback the exchange offered without actually providing the liquidity that the kickback was presumably meant to entice…"Slow market arbitrage"…occurred when a high-frequency trader was able to see the price of a stock change on one exchange, and pick off the orders sitting on other exchanges, before the exchanges were able to react…All three predatory strategies depend on speed. -pg 172
By the summer of 2013, the world's financial markets were designed to maximize the number of collisions between ordinary investors and high-frequency traders–at the expense of ordinary investors, and for the benefit of high-frequency traders, exchanges, Wall Street banks, and online brokerage firms. -pg 179
[Re: Dark pool arbitrage] IEX had build an exchange to eliminate the possibility of predatory trading–to prevent investors from being treated as prey…Almost magically, the banks had generated the need for financial intermediation–to compensate for their own unwillingness to do the job honestly. -pg 229
40 down plus 12 to go.
*Puzzle Masters were the ones hired to design a system so that traders using it would be safe from the unscrupulous actions of HFTs. (Again, noting that not all HFT behavior was untoward.) In doing so, they figured out the ways in which HFTs stalked their prey, and were able to diagram the predatory tools used.