Dark Pools: Fear And Loathing On Wall Street

As Ted Stamas from Seeking Alpha has written in his latest article, that age old axiom, “Just because you’re paranoid don’t mean they’re not after you,” may ring true for many retail investors where High Frequency Trading (HFT) is concerned. Investors are already scared stiff about the fiscal cliff in the United States, government bankruptcies in Europe, unrest in the Middle East, and then there is that psychological hangover from the Flash Crash a few years ago. The Flash Crash is where the Big Board tanked 1,000 points in a matter of minutes and was caused by high-speed trading robots, part of the potent underlying force of HFT.

Recently, Crown Business published Dark Pools by Scott Patterson, which takes us through the 20 year history of High Frequency Trading. I couldn’t put it down. It’s a page turner that reads like a novel. You can almost consider it the sequel to his first book, The Quants, which gave us the background of algorithmic trading, and its technological assault of the stock exchanges.

What was once a cottage industry started by members of the technorati is now the dominating force on the exchanges accounting for 70% of all movement of buying and selling securities. Transactions are now done at microsecond speed with wafer thin margins. A literal cash machine for HFT firms who make money daily at the expense of not only the retail trader but the whales in the large pension plans and mutual funds.

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