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Customer Review

Format: Hardcover|Vine Customer Review of Free Product( What's this? )
I got this book because I have seen the authors quoted frequently over the last few years, and was never able to figure out what they were saying. It was clear they were against high-frequency trading, but then things always got confusing.

Unfortunately, the book is no better. One problem is large parts of it are reprints of the earlier stuff I didn't understand, and other chapters are written by Ted Kaufman, R. T. Leuchtkafer (2 chapters), David Weild and Edward Kim. None of these authors are individually clear, and there is nothing to tie together the different parts. The newly-written parts of the book cite mostly the reprinted material, or general news stories that quote the authors.

A bigger problem is there is no definition of high-frequency trading. I think of traders who put in thousands or millions of small orders, holding stocks for an average of under one minute, trying to profit from very short-term price phenomena. These are nowhere to be found in the book. The first group to come under attack is market makers who buy retail order flow. Then there are complaints about exchange-traded products. Next, systematic traders who buy and sell equities based on signals (such as price momentum) that may be unrelated to fundamental economics are criticized. There are harsh words for brokerage firms that do not also underwrite initial public offerings (the large majority). The authors also don't like algorithmic trading, that is breaking up large orders into smaller pieces to feed into the market, nor dark pools where large investors attempt to transact directly with each other without revealing the size of their desired trades. None of these have anything to do with high-frequency trading except that the last two are partly defenses against high-frequency traders. Some of the complaints may be valid, but when they're all mixed together, it's hard to understand any of it.

Although the authors never describe high-frequency trading, they do make clear they think it does a lot of bad stuff. The trouble there is some of the bad stuff conflicts. For example, they blame the disappearance of high-frequency traders from the market for the Flash Crash of May 2010. Two pages later, they claim it was high-frequency traders trading with each other that executed trades at absurd prices. You can blame high-frequency traders for being absent or for trading, but not for both at the same time.

I suspect this all makes sense in the authors' minds. Although the book often reads like a laundry list of complaints, at times it hints of some connection running through them. But it will take a patient reader to tease out what the authors are trying to say.

The one thing the authors are clear about is the solution. They want to return to high fixed commissions and a single execution platform. Apparently they trust this monopoly would use its power to provide better service to investors rather than to extract profits for insiders. They praise the 1792 Buttonwood Agreement that established the New York Stock Exchange as "rules of conduct and fair play" that "served as the foundation for all securities trading globally." In fact the agreement was between 24 brokers in New York and contains a single substantive sentence: a promise to fix prices at 0.25% commission and also to give preference to each other in dealing. I don't know what that has to do with fair play, it seems to be about protecting Wall Street revenue and keeping it inside a club.

This is not a book for people who want to understand high-frequency trading, nor market microstructure in general. I cannot find any coherent useful advice to investors. I believe the authors have something to say, but they haven't said it here.
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