2 Stockbrokers Sound Alarm about Dangers of High-Frequency Trading

Article excerpt

At their small brokerage firm in the United States, two traders are railing against the giants of high-frequency trading and warning -- loudly -- of the dangers they pose.

Ticker tape: It is an enduring image of Wall Street. The paper is gone but the digital tape runs on, across computer and television screens. Those stock quotations scurrying by on CNBC are, for many, the pulse of American capitalism.

But Sal L. Arnuk does not really believe in the tape anymore -- at least not in the one most of us see. That tape, he says, does not tell the whole truth.

That might come as a surprise given that Mr. Arnuk is a professional stockbroker. But suddenly, and improbably, he has emerged as a leading critic of the very market in which he works. He and his business partner, Joseph C. Saluzzi, have become the voice of those plucky souls who try to swim with Wall Street's sharks without getting devoured.

From workaday offices, these two men are taking on one of the most powerful forces in finance today: high-frequency trading. H.F.T., as it is known, is the biggest thing to hit Wall Street in years. On any given day, this lightning-quick, computer-driven form of trading accounts for more than half of all of the business transactions on the stock markets in the United States.

It is a staggering development -- and one that Mr. Arnuk, 46, and Mr. Saluzzi, 45, say has contributed to the hair-raising flash crashes and computer hiccups that seem to roil the markets with alarming frequency. Many ordinary Americans have grown wary of the stock market, which they see as the playground of Google-esque algorithms, powerful banks and secretive, fast-money trading firms.

To which Mr. Arnuk and Mr. Saluzzi say: enough. At their Lilliputian brokerage firm, they are railing against the giants of high-frequency trading and warning -- loudly -- of the dangers they pose. Mr. Saluzzi was the only vocal critic of H.F.T. appointed to a 24-member U.S. panel that is studying the topic. Posts from the blog that the two men write have been packaged into a book, "Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence and Your Portfolio," which was published in June. They are even getting fan mail.But they are also making enemies.

Proponents of high-frequency trading call them embittered relics - - quixotic, old-school stockbrokers without the skills to compete in sophisticated, modern markets. And, in a sense, those critics are right: they are throwbacks. Both men say they wish the financial sector could go back to a calmer, simpler time, before the old exchange system splintered and murky private markets sprang up and computers could send the Dow into 1,000-point spasms.

They have proposed solutions that might seem simple to the uninitiated but look radical to H.F.T. insiders. For instance, the two want to require H.F.T. firms to honor the prices they offer for a stock for at least 50 milliseconds -- less than a wink of an eye, but eons in high-frequency time.

On May 6, 2010, shortly before 3 p.m., the stock market plummeted. In just 15 minutes, the Dow tumbled 600 points -- bringing its loss for the day to nearly 1,000. Then, just as fast, and just as inexplicably, it sprang back nearly 600 points, like a bungee jumper.

It was one of the most harrowing moments in Wall Street history. And for many people outside financial circles, it was the first clue as to just how much new technology was changing the U.S. financial markets. The flash crash, a government report later concluded, "portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral."

It turned out that a big mutual fund firm had sold an unusually large number of futures contracts, setting off a feedback loop among computers at H.F.T. firms that sent the market into a free fall.

Despite computers' many benefits -- faster, cheaper trades and mind-boggling analytics -- they have been causing problems on Wall Street for years. …

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