The Problem of HFT - Collected Writings on High Frequency Trading & Stock Market Structure Reform

I've been following Haim Bodek's white papers and articles, which are cited in my own work on regulatory aspects of the securities market structure, and it was really exciting to see a book that brings his work together, while expanding it and providing several unifying themes. The overarching comment is that the book is a terrific reading, and Bodek's work helped connect many dots together in my own head. This book occupies a different niche compared to popular books / journalistic accounts, such as "Dark Pools" by Scott Patterson or "Crapshoot Investing" by Jim McTague, and a certain level of sophistication is assumed. Another good thing is that Bodek's book issues a grave warning but does not overdramatize / over-sensationalize. There is no overall doom-and-gloom scenario, and the author in fact documents several positive developments taking place in securities markets (I must add that some of them are attributed to his own advocacy efforts). Furthermore, as opposed to many recent empirical studies that focus on various correlations and questionable hypotheses, this book digs deep into the underlying trading processes from the perspective of a securities industry insider. The book evaluates the overall state of the securities market structure and offers several reform proposals. One piece of the puzzle is a largely redistributive effect of many rules adopted by trading venues as self-regulatory organizations. Although no rule has a truly neutral effect on *all* market participants, Bodek goes into great detail to demonstrate that certain order types are created by trading venues in order to market them to high-frequency traders, who, in turn, are able to win the zero-sum trading game. In other words, such order types contribute to the overall complexity of the trading architecture and create a de facto informational asymmetry (and hence a market failure). The author warns that "speed is only a pre-requisite" and points out that sometimes there's no adequate documentation for order type rules submitted to the SEC and available to outsiders. And who knows how these rules are administered by individual trading venues? For instance, Nanex has shown that the recent ban of "stub quotes" is often ignored. (On the other hand, the Securities and Exchange Commission has started paying attention, and the "benchmark" order type proposal by NASDAQ was recently shot down by the regulators.) The book also illustrates several wrinkles created by regulation, such as the "locked markets" prohibition in Reg NMS. Another interesting illustration provided by Bodek is the subversion of the maker-taker pricing model (in my opinion, the maker-taker approach is *not* inherently evil). The book also questions the role of high-frequency traders as de facto market makers and touches on the issue of balancing market making obligations and privileges, which surfaces again and again in current regulatory debates. Bodek justly criticizes many practices of trading venues and points to the fundamental conflict between their self-regulatory functions and the for-profit status, but he leaves some room for self-regulation. In my own opinion, the self-regulatory system does not have a real alternative, but it still depends on proper supervision by the SEC (which physically can't administer competing trading regimes of individual trading venues by itself) and the appropriate boundaries of "regulatory immunity" asserted by trading venues. I realize that this sounds like "that's-how-I-would've-written-this-book", but Bodek's future work could provide some additional discussion of competitive dynamics *among* high-frequency traders and various implications of the HFT oversaturation. Also, what specific strategies do top-tier banks use to mitigate the harm to their clients (and do they even offer agency-based HFT)? Overall, a fantastic book!

After reading two other books on HFT ("Crapshoot Investing" and "Dark Pools"), I decided to delve further into it with a more technically oriented book. All three books are excellent, but Haim Bodek's book it written primarily for professional fund managers and traders. It's a short read, and will give instituational money mangers good insight as to what is going on with stock market plumming. The SEC should also take a look at it.

This book, as advertised, is a collection of articles published in various professional forums. So it should be no surprise that it contains a lot of industry jargon, acronyms, and assumptions about the knowledge level of readers. I know a fair amount about general software, hardware, electronics, telecommunications, and computerized trading, having worked in all of those fields in my life, but I still probably only understood 70% of what was said in this book. I felt that most of the book was concerned with special order types on the exchanges, but the implications and proper (or improper) use of all those order types were not known to me. More to the point, there were no detailed examples in the book that explained the issues to readers such as myself. Many issues were mentioned, and many, many order types were mentioned, but I don't think the book did a good job of explaining (even in general) how any of them worked. Mostly the book would mention or identify something, and claim that it gave an unfair advantage to someone, without ever explaining to the reader why that was the case. Perhaps these things that I am missing are general knowledge in the professional forums in which these papers were originally published. But I think this book is weaker because of the lack of explanations. I thought the best part of the book was the authors list of 10 suggestions for reforming the current electronic markets. They all made sense to me. I thought the weakest part of the book was the authors writing style – I found that many of the sentences required two or three readings to dig past the awkward wordings and phrasings to find the meaning. I would not recommend this book to anyone except a professional who understands the many software order types used within the industry.

Haim did a great job highlighting the more complex issues around the micro-structure of American financial markets. Avoiding the typical complaints that are heard, Haim dives into the deep connections around exchanges, certain High Frequency Traders, and the order types created for those specific traders. What I found to be the most shocking was under the section The Alpha in an Order Type. Haim addresses the knock-on effects created by Reg-NMS in which certain order types were created to help HFT during specific market conditions so as not to hinder the traders strategies. The most shocking part is found at the number three slot in a list of innovations which served to preference HFT over the public. Traders who were entering orders and expecting to be "makers" wound up having their orders flipped into those that would be identified as "takers", resulting in a fee being paid. This is not a public order type and subjects non-HFT investors and non expert-network connected traders to manipulation through order types that are not part of the public record. This type of catering to HFT creates an issue around disclosure as some traders have no way of knowing about this type of back-door manipulation These order types are not the generic Limit, Market, AON, etc. They were specifically created for specific market conditions for specific traders and the only way to know them is to have cocktails with an exchange head. Think of it like this: in chess there are specific move sequences all players understand and accept. Players can only use the standard pieces and move them only in accordance with the rule book. However, lets say that with one move away from checkmate, the other player introduces a new movement ability to win the game, you'd call him a cheat. The chess piece (order type) can only be used a certain way, altering it subjects the integrity of the game to depreciation. Haim walks through the complexity of this and what it means for traders who may be identified as "uninformed". It takes guts for someone to put themselves on the line and make information like this public for all to see. Many of us address these things on blogs or among ourselves, limiting the ability of someone who isn't "inside" or "in" finance to gain an understanding of these new knock-on complexities created through the implementation of Reg-NMS. The Problem Of HFT makes this available to everyone who can read or listen to an audiobook. Anyone who is willing to share this information and subject the investors world to more honest discussions on the structure of our market from routing to order types should be listened to. You will not find another book packed with as much information as this. The collections of articles and papers is enough to bring anyone up to speed on the underground complexities about HFT that are not addressed in WSJ or IBD. A must read for professional Wall Street insiders and for mom and pop investors. No one should make another trade until they have read this material! For a cost less than the commission charged by discount online brokers traders and others alike can finally understand what happens to their order once it is sent into the fragment matrix which is the American financial market.

This book is difficult reading, but it will open your eyes. People in the financial business talk about the "buy side" (people who buy financial services) and the "sell side" (people who provide financial services.) If you've heard these terms, go read Trading and Exchanges: Market Microstructure for Practitioners and this will give you enough background to make sense of this book. HFT scalpers pressured stock exchanges to create unfair order types that let them profit at the expense of other traders. Now, market makers have always enjoyed some privileges, but responsibility was part of the deal. Specialists on the NYSE are traders of last resort, and NASDAQ dealers, back in the day, would be punished if they refused to provide liquidity. As the @AP Hack reveals, HFT scalpers hit the panic button and disappear the moment they think they are dealing with well-informed traders that could cause a large market move and create inventory risk. On top of that, they claim a hidden price from institutional investors who operate mutual funds and ETFs (our money) and from small traders who don't even know the difference between a market and a limit order. Trading and Exchanges: Market Microstructure for Practitioners I'd like to personally thank the author for making this information available in a compact and affordable book that's just right to read on the bus.

This book may seem short, but it has some interesting views on current actors in capital markets. Bodek goes into what HFT is, why it's not just another name for electronic market making, and what implications it has on the market structure.

High frequency trading is all about speed, right? Turns out, not quite. Yes, speed is a prerequisite, but to quote Haim Bodek: "the US stock market had become almost exclusively a special order type game." In other words, to play the game, you need to understand the "plumbing" of the markets, the special order types, and how they work under the hood -- without that, you'll almost always lose against the new breed of HFT traders. The problem is, these order types are neither consistent, documented, or regulated. As a result, few firms "in the know" get guaranteed returns, at the cost of all the other market participants. The system is broken and Haim Bodek provides a rare glimpse into this world... If you're not familiar with the space, I would recommend starting with "Dark Pools" by Scott Patterson first, and then coming back to these essays. Haim's work assumes that you're familiar with the field, the jargon, and the general problem, but it's also nothing a little research can't fill in.

made me aware of problems in the investing/trading world that I never knew existed. Still not sure how the items the author highlights directly affect me as an individual small time investor. Book's material is definitely focused on a level of experience and understanding far above mine.

An excellent book. Mr Bodek understands the issue very well. I read Michael Lewis's book (excellent) on HFT, then Scot Patersons book on a similar theme then ended up at this book which really nails the issue. Any authority who reads all three books will realise there is a serious problem in the markets. Supply and demand in the old fashioned sense do not drive the markets any more. Basically - HFT's and MM's playing silly little games and sucking the life out of the markets will kill the markets unless all markets jointly fix the problem. One exchange, and a level playing field where research and analysis leads to "safer" investment decision making will suit us all much better. its hard enough as it is but these days buying shares in the markets is like throwing your money into a pool of sharks where what happens next is more down to psychological games being played out in the market. Shake-out's, bots selling 20 shares to knock a price down, delayed trades etc ... what chance does the guy on the street have?

Good book for the advanced trader who wants to understand the inner workings of market structure. New traders will get lost in the technical details.

Please reprint it in a decent way and I will be able to read more than half a page... My eyes are getting sore after seconds. Who on earth worked on this book to get it printed like this???

After reading several of the conspiratorial books on HFT, this is a cool dispassionate look at the problem, more from the regulator's point of view. So not as compulsive a read but a lot more informative. The growth of HFT has driven all the fast trading into the dark pools, inaccessible except to those with a few zillions to spend on hardware and programmers. Anyone genuinely wishing to trade large volumes of stock needs to proceed very carefully, or the market will fall away apparently even before they hardly get started so we all loose out a few points from the value of our pensions schemes. The problem can be ultimately laid at the feet of the regulators who have allowed the problem to grow in the last couple of decades, apparently with the innocent aim of transferring greater profits to the stock markets themselves, but who now seem incapable of doing anything about it.

The main problem with these collected essays is that they overlap a lot. The main point is that speed of trading is not the issue, but trading types, queue jumping, hide and light and so on are, tools which give an unfair advantage to market users that know of these little-defined order types. The origin and effect of this is discussed in various ways by each article, so by the end you feel like you've read the same things 10 times, and either you've drunk the Kool Aid or you've started to feel slightly suspicious of the charismatic leader's repetitive, apocalyptic ramblings. The information on other order types was interesting, but despite the dire warnings about the subversion of the market the financial doom and gloom doesn't present much of a way for a normal trader to make the best of the status quo, so it's of limited use.