According to Edgar Perez, author of Knightmare on Wall Street, The Rise and Fall of Knight Capital and the Biggest Risk for Financial Markets, stock markets are not any more ‘rigged’ than at the beginning of financial trading. He sustains that in free markets, participants are capable of making their own decisions. Different participants have always sought out an “edge” in different ways. Some do deep dives on the fundamentals, others look at related markets and others optimize for speed, therefore, arriving at different prices for the same instruments.
He further claims that all traders agreed on price, there would be no need for financial markets. Efficient markets need a mix a participants trading for different reasons and from different perspectives. Efficient markets are based on trust that the trading infrastructure will be up 100% of the time and that trading participants have systems 100% tested. That’s where regulators play a role by enforcing the rules that can strengthen trust in the market and stopping the “sad new market reality”.
Knightmare on Wall Street, The Rise and Fall of Knight Capital and the Biggest Risk for Financial Markets, was recently reviewed by The Huffington Post which praised its “great historical analysis and insights into what exactly went wrong” with Knight Capital. “Edgar Perez’s book takes the reader on a wild ride. A forensic analysis showed how an old forgotten line of code, like an ex-girlfriend, showed up and turned itself on, which began instantly trading a cascade of orders. By 10:00 am that morning, the Knight Capital IT team was able to stop the program, but it continued finishing trades for the next fifteen minutes. Then they began to assess the damage.