The Algorithmic Monsters Threatening The Global Financial System

As David Leinweber reported, Scott Patterson’s new book “Dark Pools” has some remarkable quotes. “We feel we created a monster,” says one of the creators of Island, the pioneering electronic securities exchange. I read that Ghengis Kahn had 12,000 children; in the world of electronic markets, Island may have more offspring. Earlier systems had humans in the loop somewhere, to revise or approve quotes and trades. Island was on full auto all the time. Its DNA can be found in electronic markets operated by retail brokerages like TD Ameritrade and eTrade to bigger fish like Goldman Sachs, Morgan Stanley and Credit Suisse (and for a long time, its code as well).

Haim Bodek was a senior wizard at Hull Trading in Chicago. A true Toscanini of electronic trading, he was a good part of the reason why Hull was so profitable leading Goldman to buy them for $600B in 1999.  As electronic markets evolved , Patterson writes, it had become “a market so chaotic, complex and treacherous that it could cause a brilliant trader such as Haim Bodek to conclude that the entire system was rigged.”

Even long-time participants in electronic markets will learn a lot from this book. The dark secrets of the  Zero Plus “never lose” strategy. The secret paths to the front of the line in what used to be the limit order books, which had acquired Dungeons and Dragons-like complexity.

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