Themis Trading LLC Joseph Saluzzi: Masters in Business (Audio)

They identified some glitches from algorithmic trading, from high frequency trading, issues with dark pools, and they've been a pretty vocal set of um more than critics, but participants in the markets who want to make them better, fairer, less expense of uh more even handed for for all participants. Uh they've brought a lot of um let's call it malfeasance

to the public's attention. Their first white paper had come out in two thousand eight, right in the middle of financial crisis, when no one was thinking about things like market structure. But once we had the two thousand and ten flash crash, I think people started paying a whole lot more attention to them. I know these guys probably for five or six years, um, through the usual circuits, radio, TV conferences, what have you. You know, it's a really

small world and you end up bumping into them. Today's conversation is a little technical, a little wonky. If you find this sort of stuff interesting, I think you'll find it fascinating. Uh. There are very very few people who are as as knowledgeable from a trading perspective about market structures and potential flaws in what's going on. And you'll hear. You know, things have gotten better for the flash crash, but not nearly as as good as as Joe and

sal would like to see them. Um. So that's a positive, but you know, we're still not quite there, and there's still risk of another flash crash, not only in equities, but as we've seen in treasuries, in currencies. It turns out that commodities maybe the best structured market there is because they have some inherent rules and inherent structures built in that work better than some of these other markets.

So I could keep babbling about this for hours, but rather than do that, let's just go right to my conversation with Joe Saluzzi. Of Famous Trading. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My guest this week is Joe Saluzzi of Famous Trading. Him and his partner are the authors of Broken Markets. How high frequency trading and predatory practices on Wall Street are destroying investor confidences and hurting your portfolios. Joe, Welcome to Bloomberg.

Very thick, great, thanks for having me here today. So I wanted to have you guys on, and by coincidence, it works out that you follow a week where we had a quant Cliff ast Nest fascinating conversation, but he's been a fairly he calls it tepid defender of high frequency trading before. So so it just turned out fortuitously that we have you on the week after UM and coming up we have Brad Katsuyama from i X and

he's also going to discuss market structures. But before we get into the nitty gritty of this, a little background about yourself. UM finance, bachelor's at n y U and then an NBA at Chapel Hill down at North Carolina. Before you, guys founded Famous Trading, you worked at instant at But the question I really have to ask is how did you find your way into investigating issues in market structure. Yeah, that's a great question. And if you to ask me, you know, five or eight years ago,

would we be here saying absolutely not. You know, our our job is to trade stocks. That's what we do for a living. Where agency brokers, we trade for institutional clients, hadge funds, mutual funds, and so on. But we got our start as you mentioned, Sal and I both worked at Instant in the nineties, in early nineties before electronic trading, just as electronic trading was really taken off in the equities business, so we kind of we cut our teeth

trading electronically. We learned a lot there, We really saw it progressing, and then started to see the rule changes happening mainly at the SEC some things like regg ets and a few other regulations. So let's let's get into that in a little bit. But for for the lay person who may be listening to this and not familiar with Instant, I began my career as a trader, So you had either a level two or level three depending on the access, whether you were buyer or whether you're

making markets and Instant. It was a private network that institutions. Institutional network used to buy and sell stocks with each other when they maybe were trading a little outside of the market, outside of the been asking moving real size so as to not disrupt the market. Is that a fair Yeah, that that was its original intent exactly you said. Um. Eventually brokers came on the system, just like today, finding liquidity was tough back then when you had two institutions

trying to cross stock, they didn't exactly always meet. Brokers were then allowed on the system, but the real action on Instant was between institutional investors was blocking up stock, was trying to put up fifty a hundred thousand shares without moving the stock. And and that's the trick and even today there's still the trick to the trading stocks is trying to find a piece of liquidity, trying to find that block without having the noise come through and

a lot a lot of that excess leakage. So that's what our job was. Our job was to facilitate trades. We weren't prop traders or any agency guys just like we are now. So so you traded on behalf of endowments foundations truss hedge funds, which were much moller way back then. Mutual funds were the big boys on the block in those days, and so your business were commissioned brokers.

You would get paid for the trade you executed on their behalf right and even better, actually the clients had the system on their desk themselves, so we were actually we were more coverage people. So we covered an account and whether it's you know, you kind of helped that account along, but they can actually hit the keys themselves.

They didn't need us. And the power that the buy side, particularly the institutional investment community got, that was the first time where they were really involved in the process and they really liked it, which is why the instant revenue stream went like a ski slope from the early nineties. It really ramp. It was so from back in the nineties.

What has changed in the markets? A lot, uh, well, a lot for the good, A lot for so you know, we're known as critics and so on, but we don't we see a lot of good that has come over

over the last ten fifteen years in the market. Narrowing spreads, lower commission costs um and that came about really around two thousand and two that's when decimalization came out, when they changed those audits and quarters right that we were trade actions and everybody back, everybody who was on a trading desk knew what teenys were teeny the courts even it was crazy stuff. It was sixteenth of a of a cent. And I was good at doing math in my head, but a lot of people had a hard

time with it. Decimalization was good for the people who were a little fractionally challenged. Let's call it absolutely a good thing. Um. One thing that they forgot about was, you know, putting in some sort of minimum spread. But we can get to that later when it comes to small caps. But really, electronic trading is what brought down

the cost of trading right today. There could be this whole argument, we can get into it later about high frequency trading and whether or not that increased or decreased cost. But the real fact, and you look at charts and you can see this transaction cost for institutional investors dropped around two thousand and two, two thousand and three four, that's when the real drop and the real decline came in. Since so oh seven, we're oh, wait, we've kind of

leveled off. We haven't. We've gone down and we've pretty much stay down there. So that drop in trading costs, did it imbute to the advantage of the investor the institution? Where did that squeezing of margins end up falling? That that should go directly to an investment because you're a if you're a hedge fund or an investment advisor and you have fees and expenses, transaction costs is certainly one

of them, or at least explicitly commissioned costs. You know, there's more of an implicit transaction costs, which will you know, we talk about all the time on the on the institutional world, is how much does it costs you to really get into it and out of that stock? How

much leakage was there? Did you move the stock a certain amount, did you get the v wap the volume weight at average price, or did you actually increase it because you left a lot of trails and that that is really what implicit transaction cost is, and that, you know, that's one of those things that's kind of stayed the

same over the last few years. So the approach of big institutions, or at least it used to be and I'm assuming to some degree it still is is to be a little stealthy and to try and get these trades off without just you know, the signs in the marina are at this point on it's five miles per hour, no wake. They don't want to leave a giant wake in the market. They want to sneak in and sneak out.

And really that's my job, my real job now, and when we're not writing books and writing log posts, to trade for clients and to leave is little weak and that's a great way of looking at it as possible so that others aren't pretty much attaching to what you're doing. And it's difficult, even though everyone thinks that there's all electronics and algorithms and whatnot, it is really difficult to make sure that you're not being spotted and taken advantage of.

And that's how you lower your transaction costs. You lower them by not being spotted. I'm Barry ridd Holts. You're listening to Masters in Business on Bloomberg Radio. My guest today Joe Saluzzi of Famous Trading, co author of the book Broken Markets. Let's continue our conversation a bit about what you've described as a market structure that's become broken.

So we were talking earlier about the nineties, how things change today, They've changed a lot when it comes to the actual who's trading lot and the types of players that are out there, and the the diversity of liquidity and diversity of market participants. So what we found out, and I'll just back up in real quickly, we found as we were trading throughout the middle of two thousands too, thousand and six, two thousand and seven, two thousand and

eight really changed a lot. And there was a reason why it changed a lot, and it was because of a regulation called Reagan MS that the SEC approved. That's the National market system. What what did that regulation do? It pretty much exploded the equity universe. Were used to have particularly listed names on the ux dock scene, names where there was a specialist down on the floor and a human was actually buying and selling and and setting

the price correct. And they had about eight percent market share on the New York Stock Exchange pre oh seven, pre Reagan MS. Now they're around and that dropped on was overnight as soon as the rule was put in place. Reagan MS, basically it was intended to help competition. It wanted to allow other exchanges and other venues to post their bids and offers and have people interact with them and not ignore those quotes. Conceptually, that's a great idea.

You should have to trade with a venue that has a better price, right well thinks, in other words, the best bit. So if you're a seller, you should your broker who's operating in your half, on your behalf, be hitting the highest bid, the best bid as opposed to just what's most convenient. That's exactly it. And and one of the parts of the rule is called the Trade through Protection or rule six eleven. And that's what it says.

If the best bid or offer before you can trade, let's say you say the best offers ten cents before you can trade a fifteen cents, you've got to clear the ten cents. So that for a block trader that becomes potentially a problem. You've got to kind of sweep through those levels, which we can do through what they call electronic give They have an ISO orders into market

sweep boarders with. But the bottom line was, all of a sudden, once this this fragmentation with the sec called competition, we call fragmentation it allowed noise and different types of venues to start coming through. And that's where the games began. And that's where the high speed traders, the high frequency traders as their so called, so they invent they started coming in. So let's define that, because I know people are gonna say, I hear about h f T. I

hear about, but what are high frequency traders? Really? It's a great question. And I was on a CFTC subcommittee and the and the job of our sub committee was to define high frequency trading, and we really didn't come up with a very good definition. I actually dissented to a public and when they finally came up with it,

because it's really hard to define. It's it's it's not exactly you know, it's certainly obviously using speed and using technology to you know, it's and we think it's certainly a matter of when it comes to inventory and net positions being close to zero at all times. They're not holding huge positions, although they could be long one particular options contract and short the stock, or a long an ETF and short the future. But at the end of the day, the net kind of neutral. They're not carrying

any inventory. They're in and out very very quickly, very short holding periods exactly well, and now some of them will hold and and actually now we're starting to see some public statements. There's an s one out there from one particular HIPT. They're holding positions, but they're usually being netted out against others. And we don't necessarily have a

problem with a high frequency trading market maker. I don't have a problem if there I want to trade with any participant in a market, in a pool that's all trading on a transparent and fair way. Why wouldn't I want to trade? Diversity is a good thing. We take issue with some of the high frequency traders who are more when there's lots of pinging and sniffing, and and

we can get into exactly how this goes. So let me ask you a series of questions, or rather than that, I'm gonna give you one word and I want you to define it. And I have about ten of these. We'll see how far these go. Let's start with co located servers. A co location is you can put your server at the New York Let's use the New York Stock Exchange facility right next to the main matching engine, which sits in Mahwah, New Jersey, not on you with you know, the stock change is not on Wall Street,

it's in Mahwah, New Jersey. You can rent a cabinet they call it a cage and put your server in there. It's got an equal length cord just like everybody else in the facility to get to that engine. If the trick is to be as close as possible so that you can see the data coming at or process the data as fast as possible before your competitors a process so relative to co location, let's talk about latency arbitrage. Great question, Okay, So lazy RB is basically the matter

of having two separate quotes. What I mean is if I was a high speed trader and I can build my own quote. So what I do is there's twelve, there's eleven stock exchanges soon to be twelve again. But what you would do is you would take all those stock exchanges, get a direct data feed into them, co locate your computers and basically take out any sort of latency or time to little delay and create a quote.

Will create an NBBO, a national best bit or offer that is most likely going to be faster than what the public sees because they see it through something called a SIP or a security information processor. So there's a difference in time, and there will always be a difference in time because the SIP has to aggregate all of those various exchanges or eleven or twelve and then show it, whereas if you're just doing one, you could be a little well, you're doing your own and you're picking and choosing,

and you're creating your own quote. And the problem with the SIP is that NASDAC, the for profit exchange, runs the SIP. They're actually the provider of the SIP for a couple of years. Last year I had a little problem with the SIP, and the question became, are they spending enough money upgrading the technology so that the SIP is as fast as everyone else? And currently it used to be around a millisecond time delay. Now it's at

a half of the millisecond. It sounds like nothing, right, but a half of a millisecond, So I Frequency Trader was all the time in the world. We'll talk a little bit about flashboys later, but the book begins with the story of creating a fiber op to cable in a perfectly straight line from New York to Chicago in order to shave a couple of minutes, literally a couple of milliseconds off trading. And the guys who did that spent a billion dollars on it, and it was an

enormous return on that investment. Let's keep going. What is quote stuffing? Quote stuffing is a theory. It's never been proven at the SEC, but it certainly does seem to exist what we've seen evidence of it. Nan X by the way, he puts out these fabulous graphics showing all these giant surges of quotes that show up for a millisecond and then disappear. Incredible work that NanoX eric over And now I mean he could be he should be

working for the SEC. That the amount of data that he processes, things that he sees, it's amazing that the folks in that the SEC or the other regulators don't see this, which kind of scares us a bit. But quote stuffing is that if stocks trade on what they call channels, is maybe there's eight is eight D in

one channel e F and another. If if you're looking at stock in the A channel, you can kind of go after another stock send through a whole bunch of quotes and then kind of extract out that to make your processing faster. It's an interesting theory and it's certainly that it's been proven. It's actually been talked about in some regulatory documents as well. I'm Barry rid Helts. She listening to Masters in Business on Bloomberg Radio. My guest

today is Joe Saluzzi. He is one of the partners of Famous Trading and the co author of Broken Markets and a long standing critic of market structures, high frequency trading and some of the other things that we discuss that works uh to the investors disadvantage. Earlier we were discussing um things like co okay ation and packet sniffing. Let's talk a little bit before we get to the flash crash. Talk a little bit about spoofing and walking away.

What what is spoofing. Spoofing is placing bids are offers where you have no intention of trading them, and there's actually been a couple of cases just recently. The CFTC has, by the way, has much more the Commodity Futures and Trading Commission much more power now under Dodd Frank to

go after spoofers than the SEC does. It's kind of a weird thing where how it was written in the rules, But they've come after a couple of guys recently and have settled a few cases where folks or these firms high speed firms, because you really you could manually spoof,

but it's really not going to be effective. But they were basically placed layering the book really, which is another term layers, so at different prices, a whole bunch of orders that look like there's a big buy or look like there's a big seller to move the price, and then of course as soon as someone comes in they cancel all those orders gone. There's never an intention, and that's the thing, and how do they prove that. It's an intense se scenario. And the CFCC again has a

lot more leeway. So if you're a few, if you're a guy in the in the future, his world, and you're spoofing, you should be a little scared now because the CFCC has a much much more powerful regular relation that they can use against you. I mean, isn't that really an attempt to manipulate markets with no intention to actually execute a trade? Yes, And that's exactly one of the problems that we have with certain high speed trading

or any trader for that matter. You know, we're we're critics of of potential problems in the market of market structure. Spoofing has no business being in the market, right, So here's my proposal. Tell me what the result of this is. If you want to put a bit of a quote out there, you have to have it stay there for a tenth of a second? Is am I being ridiculous

or what's the know? And and we actually had recommended that once also, But the the high speed community the other side will say that that's going to mess up their models. They can't place bids and offers and therefore they can't arbitrage certain scenarios. Let's let's say it's an et F arbitrage ore and he's gonna under you know, he's gonna trade five hundred stocks against the SMP five hundreds if he's forced to place a bitter offer for a tenth of a second, which you know, I'm blinking

our eyes in ridiculous. You know, we certainly wouldn't have a problem with that. They would scream bloody murder. And then here's the flip side. They're gonna say, well, if you do that, I'm gonna take away my quote unquote liquidity and I'll be gone. And that's where everyone gets scared. So now let's let's talk about walking away, which is going to lead us to ultimately to the flash crash. You know, when you had a specialist down on the exchange,

they were there theoretically to provide an orderly market. They were ready, willing and able to to buy or sell stocks at an equilibrium price. Uh. The counter argument, as you go back to and hey down one day, I think that was a different era. You know, everything was fairly manual back then. But that taking away the liquidly Uh. Don't they have essentially no obligation to make a market? Can't they just walk away anytime they want? Spot on exactly?

And that's the problem. Obligations are nowhere to be found in the market making community anymore, although they will tell you. I mean some of the exchanges have an obligation of eight percent within the n b b O, which means you can, quote, for a want to wait on a hundred all of stock, Thank you very much, I'll take you. Know, you can have that liquidity, But if you don't have an oblimy. That's a touch more than the flash crash. Well, we had stub quotes then they were trading mid zero, right,

that was how crazy was that? But you know, people will say the specialist system, they were problems and they land them with handcuffs and all. If there were problems, and they were, we would call those out if we were back in the nineties. Right now, sal and I will be talking about problems back in the specialist world, because that doesn't get rid of a hold of these problems. Right,

But let's think about it. At least the specialists had what they call an affirmative and a negative obligation, which means they had to buy stock at certain times and they couldn't sell its other times. And the customer knew that, and there was there was the confidence. So let's let's talk about the flash crash. May six, two thou and ten. All of a sudden, the down plummets. I remember this because I was on a flight back from Dallas. I

missed it. But and every time I fly now people point out that the market gets color crush, But um, what happened. What happened on that day? That was an evaporation in liquidity basically, right. And let me read you just a real quick quote from after the flash. Crasty sec CFTC Advisory Committee put out a report which we thought was one of the best pieces that ever came out of DC. Listen to these words they said talking

about the flash crash. Indeed, even in the absence of extraordinary market events, limit order books can quickly empty and prices can crash simply due to the speed and numbers of orders flowing into the market and due to the ability to instantly cancel orders. So the books emptied. There was a situation, there was grease going on like there is today, right, same, sorry. And then there was a supposedly a large e mini order in the futures market.

Not it was an order, right, and by the way, it was a seventy contract order, which half of it wasn't even executed until after this was over, So it really is kind of an it's a bad excuse, and it wasn't the cause. The cause was the market was on pins and needles. The bids and offers just evaporated. And there was a professor, actually he was at the

CFCC that his name is Andre Carolinko. He turned the phrase hot potato trading where they basically the h f T guys started flipping back and forth between each other until their position limits got exhausted, and then they just walked away. And there was even one in the market that said he hit the button h f T stop, which meant get me out. Everything was done. Everybody just walked away. I'm Barry rit Helps. You're listening to Masters

in Business on Bloomberg Radio. My guest today is Joe Saluzzi. He is the co author of Broken Markets with his partner Sal Arnuck. The two of them run Famous Trading, and we were previously discussing the causes of the flash crash, so let's let's go back to that. So it's May two thousand and ten, and suddenly stocks that normally trade at eight are a penny. The Dow loses some crazy I almost want to say ten percent. Is that a

bullpark number? In a matter of minutes and a half hour later, everything come snapping back as if it was no big deal. How on earth does that happen in the twenty one century in America? Yeah, I think they're still looking into that, the regulators, right, But it happened, you know. But basically the problem a lot of the retail investor's face was folks who had stop loss orders in there. If a stock got to a certain level,

they wanted to sell it. Those stop losses became market orders once they activate, well they really what happens with a market order. Normally it'll get sent over to what they call an internalizing broker. They will normally pick up this market order. They'll trade against it because they consider retail flow dumb. I'm sorry, that's that's their word's not mine, and they want to basically give it a subpenny price improvement, and then they're off they and they're trying to trade against.

In this scenario, the internalizers tend they walked away as well. So these market orders got exhausted to the let exchanges over New York and to the NASDAC and there was no bids or offers there. So what does a market order do. It goes down and starts looking for the best bit or offer until it finds something. And even and even at selling Johnson and John's in it, Accentura was traded at a penny of share, so I think was Sam Adams too, which is whatever's stock price now

a penny of share. It was absurd and it was basically it was called a stub quote, where a market maker could place a one sided quote. So he'll put a penny bid offered at a hundred dollars whatever it may be. Say, you know, the SEC has since bann stub quotes. But that wasn't the problem. The problem was why did that market or to come into the system and have no bids or offers. Why did the limit order books that we talked about before just disappear? Well,

it's not really real liquidity. It was kind of a phantom liquidity. It's there when you don't need it, and when you really need it it disappears. That's the big crew. That's one of my big complaints bearing him on sooon and disappears in the draft. So so so, there are some people who I've actually had on the show and had conversations with. Jack Brennan is chairman of the Vanguard Group. Cliff Astness, the c i O of of a q R, who have said high frequency trading and the modern competition

have made costs of execution lower. They've tightened spreads, they've done the number of things, although the reality is, you know, the spread is tightened, but it's for forty seven shares. If you have to buy five thousand shares, is the spread is still ten or twenty or thirty cents. But when when the chairman of Vanguard said, hey, this has made our costs a lot lower, how do we argue

against that? Well, that's wonderful for Vanguard, who makes money on you know how many trillions of ETFs they have right now, three trillion dollars. It's you know, I wouldn't want local, you know. But for them, it's a different business model, right they're running something and for a quant it's a different business mode because they're flipping in and

out of numerous, numerous positions throughout the day. But we're talking about a traditional institutional and investor who's trying to buy a hundred thousand shares of a stock that trades a million shares. Things have changed dramatically for them because that footprint they're leaving is basically the one that everyone's trying to pick off. That liquidity that's there disappears quickly.

The obligations of a market maker are no longer. They're the average trade size now on both lit and dark venues. Is less than two hundred chairs, less than two Trade says, it's incredible. How do you get anything done? So when we look at the flash crash, what's to prevent that from happening again? Nothing? Okay? What about that on a D do stop? Well, you won't have the O and U and A ninety two. So in other words, they'll disappear.

But they don't have to be there. They don't have to know that well they would, you know, to be considered a market maker, you have to be there. But if you can easily just shut it off and say I'm not going to be a market maker right now, but get to do that for the day, all right, And that means that the exchange won't give you the

special pricing that they give to these market makers. But just as an example, October fifteenth of last year, there was a flash crash in the Treasury mark Remember, okay that that day should be on everybody's on the blackboard, just like May six was. That was a very very disturbing event because that's the most liquid acid in the world and it crashed in a matter of minutes and then it's zapped right back again. Just like the equity mark. Bigger move was the yields are from my two tents

and one. I think it was huge in minutes and apparently no, we know it's a Ukraine situation. Whatever. It was the same scenario, But why did the treasury market now that it's a known fact that high frequency traders are now in the treasury market. Electronic trading has taken over the treasury market. So it's the same scenario that, like I read before, limit order books can quickly evaporate, and that's what we're dealing with. So our our issues.

How do we build those limit order books again? How do we put diverse liquidity back into there where people feel comfortable that they're not gonna get picked off all day? So you're sided. In the book Flash Boys, which was Michael Lewis's book, I actually read it on vacation last year, and his books are perfect beach reading. I find them both entertaining and and informative. And we'll have to get Michael on the show one of these days. But you

guys are mentioned in there. Tell us a little bit about what took place in that book and what some of the solutions to high frequency trading are coming down the pipe because we've been hearing h f T is less profitable than it used to be. Either, there's a ton of competition. The rule changes have affected them somewhat. What what's happening now? Well, the book was usually the book was tremendous just to get to debate really moving forward.

And we've been struggling with this since oh eight, right, so two thousand and eight we were at our first white paper. We've been you know, we were on sixty minutes and two thousand intent. It's been a long time, a long struggle. Michael Lewis came in like a steam roller and everyone is talking about which is fantastic, but you know, he used the word rigged, which really got people from sixty minutes. Michael Lewis said, the markets are rigged. Do you agree with that? The structure of the market

is ragged. Okay, they're they're are forces. The stock exchange model is broken there, they're poor profit companies that have

different incentives than they should have now. They used, for people who may not be familiar with this, for most of their histories, The New York Stock Exchange was a nonprofit entity up until the whole situation with their former chairman getting paid bonuses that they wasn't supposed to when you're running a nonprofit, that ultimately lead um okay, well, if you don't want to take a bonus as a nonprofit, let's become for profit company. Right, and it changed their

philosophy a change. Okay, we're now for the bottom line. We have to return money to investors because that's what public companies do. Right. NASDAC, for instance, has less than ten percent of their money generated from equity cash transactions. That means stock market So where's old money coming from? Data sales? Various things related to co location data feeds, which is a huge profit generator for stock exchanges. So

they're and even one stock exchange is owned by brokers. Okay, there's used huge conflicts of interest in the stock exchange model, which has created the problems that we see in what they call these smart order routers from the broker level, where they go to one exchange first because that offers a better rebate than it does from another exchange, or they go to a dark pool because it doesn't charge

them anything. Define dark pools for listeners. Sure, dark pools are off exchange venues that don't need to publish their quotes. Back in the day, when I was an instant that we called it a crossing net work at night because we wanted the cross chunks of stock. Now they operate throughout the day. And an average trade size on a dark pool is no bigger than a lip pool now less than two hundred shares. But but back then it

was big and fifty blocks. And there's still a couple of dark pools now liquid that in particular that's still over forty shares on the average trade size. Those are institutions crossing stock, reducing transaction costs. And some may say, well, you're shutting out the retail investor. No you're not, because those institutions are trading on behalf of retail fund, that retail money in an individual stock exactly. So that argument doesn't hold any water. But dark pools themselves have been

so perverted and so over the years. What the Barkley's case that the a g and York Attorney General is brought against the Barkley's dark Pool, which is still pending, exposed a lot of what actually goes on inside and the lack of disclosion, the lack of transparency that the clients of the dark pools don't have no idea, They have no idea who's getting teared and who gets the

order first. These are the problems inside the market structure when you talk about the term rigged, that do exist, that do advantage one class of investor over another, that need to be taken out of the market. If we're playing on a level playing field, we've got absolutely no problem with any high frequency trading low I don't care who you are, low frequency guy. I want to interact with every piece of liquidity, but I want to do

it on a fair and level playing field. So let's talk about the new exchange i e X, which solves some of these problems. Absolutely. We're a trading We were one of the first trading partners. You know, we think i X. They nailed it with their model. They got rid of rebates. Okay, there's no there's a flat fee on the I X exchange. You pay what whether you

make the liquidity or take a liquidity one feet. They got rid of the speed advantage by putting in something you know, Brad will tell you more than I need to buffer. And essentially it's a mile of spooled uh. Fiber optics, nobody has any advantage of of speed. The order comes in and then it gets buffered for a millisecond and now everybody's arriving at the same time. That's right. And they took away the gaming that goes on in other systems. And they'll tell you about who types of

clients they have. But a lot of h f T guys don't want to go there because it's not profitable. But for us, as institutional traders, we love systems like that. We'll get our average trade size is much bigger on I X than is on any other venue. That that is a very very good system. You get clean liquidity, you're crossing things up nice. That's what you're supposed to have. So the market here's a great example. The market is now starting to solve its own problems, wonderful without the

regulators mucking it up more than they've done already. So before we um uh and the radio portion of our interview, if people want to read some of your white papers, where where can they find out more about this? Sure? We run a bog actually femist trading dot com. We have a blog that we'll put out maybe three or four posts a week that we normally every topical issues on market structure. Obviously our book Broken Markets, white papers are on the website as well image trading and and

you know we don't charge for these. We don't put this. This is not a business model for us. Well, this is this is a passion. This is what we do. We invent, stickate things, and then we trade based on what we learned. Okay, welcome back to the podcast. If you're listening to this, it means you already heard the radio portion of our show, and now I get to stop worrying about the time segments and actually just relax

and enjoy chatting with my guests. I know Joe for we know each other for a good couple of years. I'm trying to figure out where I met you and Sal could have been at a conference one of the could have been certainly spoke at your conference years back, which was great. And we end up we've done a couple of shows together. We always you know, it's a

small universe that you end up bumping into each other. Um, I recall it was before the flash crash, it was when h f T really first started rearing its head. I want to say it was before the financial crisis. I want to say, oh seven could have been when did you first notice things were getting a little, you know, funky when you were trading? We we noticed it's certainly

like an oh five, oh six. Our first white paper was the end of oh eight, so that's when we publish something called Toxic Equity Trading, which kind of sat on the shelf for a while. Everybody missed it because we're in the mid financial crisis, and yeah, no one really cared about market structure. It really popped up in July of oh nine when the Goldman Sachs programmer Sergey Lichnikov, and all of a sudden people started googling what's this

high frequency trading? And they popped up our white paper, and then our phones lit up. There was a phenomenal um. There was a phenomenal blog post. And I'm trying to remember who first round it. I wouldn't be surprised if it was Zero Hedge about who is this guy that Goldman Sachs says that has escaped with the keys of the castle and if unchecked, he could bring the market. It was that the FBI. So where the hell did

these guys get that from? They had to have someone from Goldman whispering in there, and and and Sergey is still being prosecuted. He's still going through criminal eventually. And you read the story, he essentially took open source stuff that he had that basically was just a thing of convenience. And uh and by the way, a lot of this is actually in Flashboys. But the prosecution for that sham

on Guldman Sacks for for what they did. Don't cross the squid apparently not or the Matt Taibi has is still around Nobody's uh no, but nobody's He's the guy who coined the phrase a jamming. It's blood funnel into the throat of America of the vampire squid. If you remember that very very famous article. It stayed with us. So we we blew through a lot of stuff due to time constraints earlier. Let me let me ask you a few more questions that that we missed. So we

talked about improved trading costs and spreads and liquidly. The one thing that we really didn't get to um that I wanted was the difference between h f T s and specialists or market makers. For that that fact, what is the legal obligation what is the differences between what they do and what they used to be required to do? Well, that's to say, what exactly what is their obligation to

buy and sell a certain amount of shares? There is none, And actually there's a couple of h f T s. Now the bigger market makers are arguing for more obligations. They want the guys who really understand that the h f T market makers, you really know what they're doing, who have really figured this out and are not necessarily gaming the system, want more obligations. Give me some names. I can't get into all the specifics, but there was

a what else do you put in that category? Well, I don't know if I would put them in those in the positive, I haven't seen those two guys asking from more obligations. I did see a letter coming and the tick size pilot program, which has been proposed by the SEC. Virtue actually wrote a piece in their letter which I thought was really impressive, asking them to put more obligations on electronic market makers that, okay, let's step up to the plate. How about the rest of those guys?

Do they want obligations? Now? Does this give a big company like Virtue and uh An advantage. Is it a competitive advantage or are they saying, hey, let's not kill the golden goose here. I think they're they're pretty tight on their market making. They pretty much. I mean they look, they just published the next on and in there is you know, a second time around for them going trying to get that I p O out. But they've exposed pretty much everything they do. They're not afraid to talk

about it. I would love to have some of these, more of these one name h f T s that you never heard of, that have a web page of a half a page. Let them talk about their business model. Are they making markets or they just you know, a bunch of guys in a few different pods who are looking at what what we call front running, which is not really what they're doing. But what they're doing is because they have no customers. By the way, all h f t s are prop traders with no customers. They're

not what I describe as front running. You're actually right because I'm mischaracterizing it. What they're doing is they're buying a data service from the exchange which allows them to packet sniff. It allows them to see orders not after they hit the exchange. After they are traded. They like it lets them see customer orders, not their customers, someone else's customers, those orders before they're executed, so they get to run ahead of them. If we all go the

front running, it's running ahead. But we were actually what they're doing. And here's what they'll I'll put my h f T ahead and they'll say that no, no one can see an order before anyone else. It gets released from the exchange server at the exact same time, and anybody who spends the amount of money, the millions necessary to process it can see that order. But guess what not.

You know, most people aren't doing what they do, So we think what they're doing is not front running because it's a customer but it's front running of demand and front running of supply. They're building the book. They're looking for what they call book pressure, and when they see a stocks about to move based on their speed advantage off and going right, so they're taking that offer before you. They're canceling that bid before they get hit so they

don't get run over. Because essentially they're just trading getting out of positions throughout the day. Their front running demand and front running supply. Technically, nothing legal about that. Now, as a broker, if I had a client order for ten thousand shares and I decided to buy ahead of that, I go to jail, as I should because that's front running. That's that's legal front But Mike takeaway has always been,

you know, it's a zero sum game. And if these guys are are capturing a penny on a hundred thousand shares, that means the quote unquote natural buyer is not getting that penny, and you multiply it by all of the transactions, and that means tens of billions of dollars of profit each year that should be in Grandma's IRA or your four oh one k simply aren't there. It's going to the h f T farms. Yes, it's going to proprietary traders who are basically extracting that for their own and

not providing a social value. That's the key question. Are they providing They're not going back into the ecosystem of the trading world. Think about the old days when you had an investment bank that had a trading department, a research department, I p o s all sorts of different areas, and in the trading department actually was a loss leader. At times they would lose money to facilitate the other

parts of the business. But there you had the real purpose of a stock market was to help companies go pub right, bring them out, put them on road shows. That's kind of falling aside because the economics aren't there any right, the economics of the research department. Now you

talked about earlier how great decimalization is. I've read a number of people complaining that when we went from fractions to decimalizations, you you took a lot of the profit out of trading, and that profit was what subsidized research. Is that true? Yeah, And actually there's something called a tick size pilot which has just been proposed. We wrote a comment letter, the industry wrote tons of comment letters on it. But the theory there is decimalization was great,

but you never put in a minimum spread. In other ways, you collapse the spreads down to a penny. Wouldn't it make sense for stocks that or even dying, for say a small cap that doesn't trade. We're trying to attract real liquidity, and real liquidity providers are not going to hang around when they're gonna get picked off by somebody who has a penny to come in play in the game.

Where now, if it was a nickel and you wanted to get in this game and pick somebody off, it's gonna cost you more and your risk is gonna go higher. It's a really good theory. We don't know if it will work, which is why it's called the pilot program. The SEC wants to put out, but the industry is going nuts already because they think it's gonna translate them to what they call a trade at rule, which would mean that you can't trade in the dark until you

trade on lid venues first. So they haven't a fit because it would destroy their business model. But that's not what the pilot program is calling for it. So, so if we went to a nickel spread with size on on bid and ask what would that do the trading costs? What would that do to to a company like Vanguard or any of the big mutual funds. How would then impact they're they're trading right? And this would be only on small to mid cap. So we proposed the privot

program says five billion market cap and less. We said that's too high, go to like two billion in less and and and that's still a couple of thousand stocks under two billion, none of which really trade. You know, they trade a few hundred thousand shiars a day. Their orphans. No one trades them, right, nobody follows them. There's no

Wall Street coverage on them. And you know, last week we were talking about the small cap um premium and why small cap stocks have a tendency to outperform big gap stocks over time, especially if you control for junk, and that was one of the factors is their orphan stocks. There's not a lot of liquidly, there's almost no coverage there certainly isn't big firm coverage. You're not gonna get Goldman and more Maryland Morgan covering, you know, and even

scrap the small firms. The regional brokers. Remember some of the names like Robinson, Humphrey McDonald and all of these names that would be the been eating up by other brokers have went out of business. They don't have the economics to support that trading anymore. Those market makers are gone, they've been replaced by algorithms and so on. So how do you bring them back? And and the theory and Jeff Solomon over account and who's the president of account. He's big on this. That is to how do I

get these market makers back? And you have to put an economic incentive. You have to add otherwise no one's gonna do it. And the economic incentive would be a nicola a dime spread. And that's how. But you also have to have an obligation come in there and put some real size in there, not just a hundred chair that that's been one of the complaints. You see this penny spread and you go to buy something and you get forty seven shares, And what's the point I need?

The penny spread is really the liquidity is illusory, the spread is illusory. A lot of things that look like one thing really aren't. Although I'm starting to get a sense, a hint from you that your position has softened over the past few years, because two or two years ago, it was like we're all going to heck and this is a disaster in the market's gonna collapse under its

own weight. To Hey, there have been some incremental improvements and some market based improvements like I E X that are actually bringing back some positive things to the market structure. I would agree with that, and and and I think it's because of the efforts of a bunch of folks, and you know, we certainly were one of the first out of the water. But if this market structure debate didn't get pushed forward, we wouldn't be talking about improvements

right now. We wouldn't be talking about market market based solutions. We'd be talking about the same problem. So systemic risks that you guys have written a lot about, they'd still be there, right and then they are still there, But we're moving long in the right through. We're getting exchanges now, like Jeff Sprecker of the New York Stock Exchange coming in saying, hey, this make or take a model is ridiculous.

We gotta get rid of it. A couple of years ago, you know, Duncanita Howard would never would have said that. So things are different, and in the market structure debate, it's a sophisticated one. It's moving forward, and this is what we always wanted. So on a scale of one to ten, if it was a disaster in two thousand ten, at zero and ten is the optimal market structure, where are we today? Four or not even not even halfway there? Wow,

that's uh, that's a really fascinating number. What what other areas of the markets were you cop stock market wise? I mean the biggest we have issues with, like I mentioned before, fragmentation, dark pools. The non exchange off exchange percentage of volume is close to which means that almost four out of every ten shares is not traded on an exchange. So now when we look at really soft volume, which we've seen since you know, MARCHO nine lows how much of that is just mom and pop walking away?

How much of it is dark pools? Why has volume been so low? And what does that mean? Volume is low right now because volatility is low. But if ilum has been fairly suppressed for five years, has uh it well off the peak of it. We wereround ten billion shares across all exchanges back when the financial crisis was going on. Now we're closely to six billions. So it's a big drop. Yeah, because we got really lot of the noisy. You know, if it volatility is not there,

you can't profit from latency arbitrarge situations. You can't pick off someone as easily. Where is some of that volume going? It's going to other markets. The currency market has exploded with the electronic activity because it's so it's much more volatile, and it's very liquid, and you know these trillions of dollars literally, and it's it's not centralized. The they don't even have at least in the equity world, we have a linkage that's SIP the security. They haven't only got

a linkage in the in the foreign exchange world. So it's a lot easier for you to develop your own quote and to see something better than somebody else. The banks have their own problems there as well. There's an article, yes they'm on Bloomberg about the Last Look and things like that, that there's a lot of issues in the currency world, which we in the equity world. Actually we're a lot more advanced when it comes to market structure

than something in the currency. People have talked about the currency markets and and four x as the broadest, deepest market with the most sophisticated systems, and you never can you see a flash crash and concert absolutely, I absolutely think you can it. Is it inevitable? Is it possible?

Is it likely? I think it's probably likely because with the with the global event, you know, if if the Swedish bang on to Swiss, Swiss Bank decides to change the way they're going to set things which ago and you did see a rapid moving currencies because you know, is it really institutional volume, is it real bona FID hedgers coming in there trading that, No, it's noise. It's guys who are using I call it noise. But it's basically a multi asset model. So you're trading stocks, equity,

you're trading stocks, opts, and futures, currencies, bonds. You're putting it all together into this little magic sausage factory yours, and you're developing a strategy. So if one all of a sudden, there's an event in one area, you're gonna move out. So yeah, it could happen in any one of those markets. So zero to ten is a four, So that's a big improvement, but that still means we're sticks away from ten and and there's a lot of potential problem. So you had mentioned um currencies, you had

mentioned treasuries. What about commodity markets. Commodity markets a little different because they operate more in a vertical silo, so you don't have the multi exchange, multi venue model, and you have your trading oil, you're trading natures, or you're you're not. Everything isn't as it's but they use a huge leverage though they do and they have, but they're they're a lot more control that they seem to have their their grips on it better. I don't know, I'm

not certainly not an expert. You know, people used to talk about commodity markets like it was the wild West and all the lock limit down and all this crazy stuff happens, and you're saying, the structure is better than what we see else. Ironically, the the the flash crash of two thousand and ten that we spoke about earlier was stopped because of a piece of software at the CME, the Chicago Mercantile Exchange called stop logic, which said that if it got too volatile, halted for five seconds. I

believe it was five seconds. And that's really what the

bottom of the flash five second quote hall. And that tells you that every asset is linked, because when the mini stopped trading, everybody said, hold on a second, what's going on, and that guys like us who are trading stocks, but guys who have multi asset strategies who were all electronically linked, then realized, hey, there really isn't something going on here For people who don't know E Minis or the SMP futures huge leverage with that you're called minis,

but you're putting up a million dollars and trading like I don't remember what it is, but it's tens of millions of dollars of stock. It doesn't take a lot of money to swing a boatload of stock in those and it's supposedly the most liquid instrument when it comes to commodities. Yet that was also the one blamed for the initiation of the flash crash because they couldn't handle seventy five housing contracts, which makes you kind of scratch your head. Why could the most liquid security in the

world not handled. Sure, it's a big order, but it doesn't the reason that that side put out doesn't hold water at all. Right, So, first, the first rumor we heard was it was a fat thumb, which is trade or talk for somebody accidentally throwing an extra zero on an order, or or you know, just leaning on a keyboard. And you know, if you ever leading on a keyboard and here, just picture that on a trading desk and what that means when you're shooting you know, millions of

orders all at once. It it's hey, fat thumb, that's really a problem. I'll tell you one of the problem that they have right now, they don't have the surveillance they SEC in particular, does not have a surveillance system to keep up with today's modern markets, today's micro second trading, you know, and a million of a second. These guys are doing things that we can't. There's a world underneath it, right.

The SEC doesn't have a system tomorrow. They actually had to sub out to an h f T guy to build a system called Midas that COSTOM two and a half million a year, which is barely a bunch of direct fee being aggregated. How can nanex do this? And if you haven't seen the beautiful artwork that how do I pronounce his last name, Eric hunt Setter's work on

nanax dot net? Is that right? Uh? He creates these beautiful mosaic showing all these quotes and trades and their artwork their fantastic all they are visual representation of actual trades. How can he do it? But the SEC can't. It's incredible. He could have built and I've spoken to Erica and we speak to him often but he could have built Midas for a lot cheaper than they spent on it. Okay, he runs it. He basically takes in the feeds and

he analyzes this stuff. But the problem with the secs and and the problem with our regulatory system is we've got futures on one side, which is the CFCC, We've got the SEC we're doing equities and options. They're not aggregating everything, and in some counts over their treasuries. Over here, it's really very much fragment. And if if you're if you're spoofing in the currency market to affect something in the bond market, you're never gonna be caught. Is that

going on today? I don't know, because we don't have the surveillance systems to watch it, but theoretically that I would think so absolutely. So let me ask you a hypothetical question. One of the guys. So, whenever we do these these conversations, my office is always so, who are we speaking with this week? And I always tell them so, and I get some fascinating questions from from some of the staff members. And my head of research said, Hey,

do me a favor. Ask Joe, what would happen if tonight every h f T firm was shut down, what would happen to markets going forward? Much rejoicing, No, I'm just I'm just no. If they shut down, sure, you're gonna widen spreads, right naturally, If if the bigils in that gap, who will replaces them? It's a good question. Do market forces that overnight? It's not gonna happen, right, But eventually, Let's take for instance, that tick size pilot

we were talking about. If the h f T s don't want to play in the stocks because of a nickel spread, there will be someone coming along. The vacuum will be there's money to be made, there's it to be made. Real traditional market makers will come back, Real liquidity will come back. Maybe the spread is a little bit wider, but we would argue that to spread is

really today's market. Like you was saying before, if I want to buy five thousand shares, how do I get five And if I can do it with a nickel spread, that's actually a better thing, right the hundred fifty to forty. By the time you feel thousand shares your fifteen cents away, that's right. And we've heard all sorts of stories about about those sort of sweeps and that penny spread is nonsense now it is, it isn't. And that's where you get picked off by the way that people will see

you coming. And that's where brad over they move out of the way. They will, they'll disappear if you're coming through a slower router, and the next thing you know, they'll take the stock in front of you, and you have now paying a nickel higher and you've got two eighty seven shares, Like, what the heck are you doing? That's we have to be when you're trading now, especially with larger pieces, you better be sophisticated. You better know how the routes work. You better know what's going into

every route, what type of order is going out. We didn't even get into these crazy order types. But you need to know the plumbing right or or like if you ran a race car, if you're a race car drive, you want to know what's in that engine. You better know the inside of this engine. If you're trading size

right now, you will get picked off. And then unfortunately, at the end of the day, you may think you got what they call a v WAPP or volume weighted average price, that that's gonna be across all these different bids and offers where you actually paid you match the daily v So everybody. There's a lot of managers that will try to benchmark the v WAP and they'll say, if I got as good as the VWAP, I did

a good job today. And we would argue that you're not over paying through the trades correct, correct, because you're

doing an average job, because that's the average price. And we would argue that if you're not sophisticated with your routes, you're actually causing that VWAP to be higher than where it should if you're a buyer, or a lower if you're a seller, because you're not really paying attention to the intricacies of why did that hundred shairs go up on the bat's inverted exchange, Why did it go up in a dark pool? Why is that route going here constantly in the same low rebate venue or high rebate venue.

These are the questions that we ask all day long why our trading is different than others out there. But once you learn the inside of it, then you'll be armed a little bit better. It's still gonna be tough. It's not easy, So you've been doing this for twenty plus years. I remember when I began around that same time as a trader and as if I'm a if I'm a seller, and suddenly Goldman shows up on the top of you know, it was mostly NASDAX stocks on the top of the box as the bidder for size.

I would get out of the way. But I wasn't a market maker. I was just executing orders um either for proprietary trades or on behalf of clients. This is really very, very different than those days. That's almost simple and quaint compared to the complications you're described today. It's

it's you know, that was like the axe. They used to call it, right, that's right, and the ax came in everybody, and you knew in different stocks it was different different how you know, there were certain there was certain stocks that when bear Sterns showed up, hey, everybody out of the pool. They were starting to suck up a million shares or certain hedge funds, let's just call it.

That everyone knew was quote unquote March smart money. They started ripping through his stock, but that was you know, his intelligence. Sure there was issues back then of of transparency as well. But the market now is so much different, and when you think about it. Scott Patterson, the Wall Street Journal reporter, wrote a book called Dark Pools, which I think is tremendous, by the way, and I love now.

He also wrote The Quants Fantastic, which is one of my favorite books describing what's taking place over the past ten years. But dark Pools is almost like The Quants Part two. It's very sophisticated, it's very fascinating. And he goes through the the kind of the the lineage of what HFC, where they came from, and he goes back to this firm called Island. It was J C. And and when we were at instant that that was one

of our competitors. They were this small kind of firm, but a lot of the guys who were at Island kind of morphed out and they went to these h F T firms along the way. And it's almost the Island came out first and came up with this i'll pay you to add liquidity theory. It was their original thing that said I'll pay you to add liquidity, and now it's in every major stock exchange around the world.

That was their competitive advantage. That's how they attracted all this volu The other thing about the book Dark Pools was I think I may be confusing this. I think that's where I first learned that Renaissance Technologies one of the most successful hedge funds of all time a year for thirty years. So successful they said to their outside clients, Hey, here, thanks for your money, but we're just gonna invest our own money. That's how you know it's not a nonsense return.

We'll we'll, we'll take it from here. Um that they were one of the earliest high frequency traders and had before anyone in Wall Street even had a clue what they were doing. That needs to talk it. These guys had come up with a series of just ingenious ways, long long before everybody else had figured this out. And that's when it was easy pickings for them, right, it was easy to shoot, have a latency, our situation going on, and no one even knew what the heck it was.

And now I mean to the lots of competition much harder. It's changed, and so we increase their cost so so they're not as profitable, No one's Jim Simmons retired, they're not as profitable, and I keep although they're still wildly successful, and I continue to read that h f T firms are just becoming less and less profitable, less competition and and a handful of big guys are now dominating the volumes.

And whether that's Virtue or Get Go or a handful of other companies um which are also which you don't go into details of names and in broken markets, but Flashboys does so. So is this just naturally on the wane or what's going on? It's the term they call the race to zero. This is by far the race they're trying to zero out that that latency has gotten

so squeezed. But here's the problem for an h f T. If I'm an h f T and you're an h f T and you decide to build a new microwave network, that's gonna get you one micro second fast or some data and the thousandths of a second million, a million, millions, a million, and whatever it may be. I'm just throwing numbers out there. But you're gonna be faster because you're gonn to spend ten million dollars, say, building a microwave between here in Chicago over the is gone microwave. It's

now over the lasers, whatever else to exact. But if you do it, I have no choice but to do it if I want to remain competitive to you, which means now it's gonna cause me ten million, which means that's gonna be sucked right out of my profits. That's why you see in the margin start to collapse. So eventually, I think what will happen is the smaller ones are going to drift off. They will not be able to compete. The bigger ones will get bigger, which does become an

issue of how much power they have. And but that's where you're going to have to have some regulations coming and say, okay, let's get some obligations on these guys as well. They're not going away, They're so h f T is here to stay. We're not. We're not going to see them disappear. But it's morphing. In other words, it's becoming something different. I guess they're trying to legitimatize themselves, right. It's it's like, well, is that is that gonna happen?

Are they going to become obligated legitimized players or they still just snipers picking off you know, millipennies will be different. There are different ones. There's you know, h F T is different and it's really hard to bucket. And we've learned we were not the smartest when we first started doing this, and we've learned a lot a lot over the years, and we've learned that you can't just bucket HFC into one bucket. They are different types of players, right,

and they do different things. But the smaller players who are there to pick off and just kind of kind of sniff out a little of what we call venue arbitrage, trying to pick you off because one venue slower it in the other that business is going away. They they're squeezing that out, that that that latency are that used to see when you trade bats versus nasadac or a dark pool, and the dark pools are now being more you know, investigated more like two attorney in general, that's changing.

But market making, if you call it market making, you know, we call something different like you know, specialists and so on. But if they're market making a stock versus an e t F or an e t F versus the future, and they would still want to do that and they think they're profitable. Congratulations, good luck, but let's play by

the same rules. That's amazing. I can remember as a trader being able to visually see different prices, or throwing out a quote an eighth below the bid, suddenly seeing I'm filled, and immediately selling it to somebody else an eighth higher. The markets were at least on an eighth level, so inefficient. And I'm talking the nineties, we're not talking post two thousand, um. But you could literally do that if you were quick on the keyboard and you had

a couple of little macro set up. But you didn't even know it. If you call that high frequency trading, it's it's a human manual. Uh, just a quickly picking off an eighth on a thousand shares. Not exactly high Fenci. By the way, whenever you whenever you did that, it was it was just a rare. It was on a slow, boring day and you had nothing to do, and let's

throw a few quotes out and see what happens. Suddenly you find yourself filled and you're you know, at worst you're out for a break even or an eighth loss. But it was just one of those things that and you always wondered, why can't you do this automatically. Why wasn't there technology for it? Never in a million years imagining it would be like it, it's got and it's gotten today. Yeah, and there is a have and have

not in the world of trading now. The halves are the ones who can pay enough money to buy that co location facility, to rent the co location facility, to purchase the data feeds, to set up a microwave network, to do all the things they do right, So you have created a tiered process. And in the in the trading world, there's no doubt about it, there are those that do and those that don't. So you know, you're really not competing on the same level playing for it

when it comes to technology. But look, I'm not going to argue against certain things, but i am going to argue when there's a dark pool out there and he's advantaging one client because that client is you know, an h F T and he's gonna say, I'm gonna give you a special look or something like that. Here we

have a lot of issues. Or you know, couple aren't exchanges doing something similar by selling that data they are and data feeds what they called the proprietary data feeds we think should absolutely be looked at by the SEC should be why they have you. Here's what the exchange will say, Hey, Barry, you want to buy a data feed, I love to sell you one, buddy, ten thousand a month. Here you go purchase and anyway anybody can buy. They're

going to turn around. But realistically a month doesn't mean that if I'm not buying a hundred chairs I'm gonna need. It doesn't help you. It doesn't help you. And then you also got to build the entire infrastructures to make that data. The data feeds just a fuel that runs the engine. You gotta still build the engine. Okay, But what they're giving in these data feeds is not just there's a lot of information and a lot of content.

In fact, a couple of years ago we actually wrote a white paper where we talked two of the major exchanges giving out information on what it was supposedly a hidden order flow, so an institution could put in fifty shares hidden I don't want anybody seeing it. But they were putting tags on this flow, which basically allowed others to re engineer it. People who bought the data feeds and figured out that there was a buyer there. So

let me ask you a question. Knowing the exchanges for profit are willing to do that, why would anybody trust anything they say? Aren't these just shameless salespeople who are basically going to say, I will sell this client down the road to that client because I can. Is that what actually took place? It their penalties where they're fine,

the SEC didn't even look into. But the exchanges after they call grief from the institutional community, changed it voluntarily, just like the direct Edge exchange a couple of years back with doing flash orders where they were showing orders to a certain subset of clients for half a second, which is an eternity, and they were half a second, would you like to buy us? No? Okay, you go out in front and front of yourself. It was ridiculous. But but but but here's what they'll in their defense.

They're gonna say, well, wait a second, show everything we do with public everything that we do has to be filed with the SEC after the fact three months later in forty pages of six point legal ease. But buddy, it's approved by the SEC. Why would they ever allow certain order types to be approved? Who is that the SEC? Looking at the exchange documents saying, yeah, that looks like it's fair to everyone. It's insane. So here's why we

call it a broken market. Because you've got regulators who are allowing this, exchanges who are for profit h f t s who take advantage of it, and in between is the retail and institutional guy going what the hell is going on? That? That's unbelieva. I'm gonna end this segment with um a quote from my colleague Josh Brown, who said, and I love this quote, the best way to defeat high frequency trading is with low frequency trading.

Meaning if if you're not in there, if you're not in there as a retail investor, if you're not in there trying to compete with these guys, you're not gonna lose them. That that's that's exactly right. Well, well, this has been really a ton of fun. Thank you so much. Joe, Say, how do your partner salve for us? We've been speaking with Joe. I was gonna say, Joe Arnock, we've been speaking with Joe so Lousy, author of Broken Markets and

partner with Sal Arnuck of Famous Trading. If you enjoy this conversation, be sure to look up or down an inch or two on iTunes or on bloomberg View dot com or on Bloomberg dot com to see the rest of our podcasts. I'm Barry Ridults. You've been listening to Masters in Business on Bloomberg Radio. You're listening to Master's in Business with Barry Redholts on Bloomberg Radio.