The Problem of HFT - Collected Writings on High Frequency Trading & Stock Market Structure Reform

I've been following Haim Bodek's white papers and articles, which are cited in my own work on regulatory aspects of the securities market structure, and it was really exciting to see a book that brings his work together, while expanding it and providing several unifying themes. The overarching comment is that the book is a terrific reading, and Bodek's work helped connect many dots together in my own head. This book occupies a different niche compared to popular books / journalistic accounts, such as "Dark Pools" by Scott Patterson or "Crapshoot Investing" by Jim McTague, and a certain level of sophistication is assumed. Another good thing is that Bodek's book issues a grave warning but does not overdramatize / over-sensationalize. There is no overall doom-and-gloom scenario, and the author in fact documents several positive developments taking place in securities markets (I must add that some of them are attributed to his own advocacy efforts). Furthermore, as opposed to many recent empirical studies that focus on various correlations and questionable hypotheses, this book digs deep into the underlying trading processes from the perspective of a securities industry insider.The book evaluates the overall state of the securities market structure and offers several reform proposals. One piece of the puzzle is a largely redistributive effect of many rules adopted by trading venues as self-regulatory organizations. Although no rule has a truly neutral effect on *all* market participants, Bodek goes into great detail to demonstrate that certain order types are created by trading venues in order to market them to high-frequency traders, who, in turn, are able to win the zero-sum trading game. In other words, such order types contribute to the overall complexity of the trading architecture and create a de facto informational asymmetry (and hence a market failure). The author warns that "speed is only a pre-requisite" and points out that sometimes there's no adequate documentation for order type rules submitted to the SEC and available to outsiders. And who knows how these rules are administered by individual trading venues? For instance, Nanex has shown that the recent ban of "stub quotes" is often ignored. (On the other hand, the Securities and Exchange Commission has started paying attention, and the "benchmark" order type proposal by NASDAQ was recently shot down by the regulators.) The book also illustrates several wrinkles created by regulation, such as the "locked markets" prohibition in Reg NMS. Another interesting illustration provided by Bodek is the subversion of the maker-taker pricing model (in my opinion, the maker-taker approach is *not* inherently evil). The book also questions the role of high-frequency traders as de facto market makers and touches on the issue of balancing market making obligations and privileges, which surfaces again and again in current regulatory debates.Bodek justly criticizes many practices of trading venues and points to the fundamental conflict between their self-regulatory functions and the for-profit status, but he leaves some room for self-regulation. In my own opinion, the self-regulatory system does not have a real alternative, but it still depends on proper supervision by the SEC (which physically can't administer competing trading regimes of individual trading venues by itself) and the appropriate boundaries of "regulatory immunity" asserted by trading venues. I realize that this sounds like "that's-how-I-would've-written-this-book", but Bodek's future work could provide some additional discussion of competitive dynamics *among* high-frequency traders and various implications of the HFT oversaturation. Also, what specific strategies do top-tier banks use to mitigate the harm to their clients (and do they even offer agency-based HFT)?Overall, a fantastic book!

After reading two other books on HFT ("Crapshoot Investing" and "Dark Pools"), I decided to delve further into it with a more technically oriented book. All three books are excellent, but Haim Bodek's book it written primarily for professional fund managers and traders. It's a short read, and will give instituational money mangers good insight as to what is going on with stock market plumming. The SEC should also take a look at it.

This book, as advertised, is a collection of articles published in various professional forums. So it should be no surprise that it contains a lot of industry jargon, acronyms, and assumptions about the knowledge level of readers. I know a fair amount about general software, hardware, electronics, telecommunications, and computerized trading, having worked in all of those fields in my life, but I still probably only understood 70% of what was said in this book.I felt that most of the book was concerned with special order types on the exchanges, but the implications and proper (or improper) use of all those order types were not known to me. More to the point, there were no detailed examples in the book that explained the issues to readers such as myself. Many issues were mentioned, and many, many order types were mentioned, but I don't think the book did a good job of explaining (even in general) how any of them worked.Mostly the book would mention or identify something, and claim that it gave an unfair advantage to someone, without ever explaining to the reader why that was the case. Perhaps these things that I am missing are general knowledge in the professional forums in which these papers were originally published. But I think this book is weaker because of the lack of explanations.I thought the best part of the book was the authors list of 10 suggestions for reforming the current electronic markets. They all made sense to me. I thought the weakest part of the book was the authors writing style – I found that many of the sentences required two or three readings to dig past the awkward wordings and phrasings to find the meaning. I would not recommend this book to anyone except a professional who understands the many software order types used within the industry.

Good book for the advanced trader who wants to understand the inner workings of market structure. New traders will get lost in the technical details.

Please reprint it in a decent way and I will be able to read more than half a page... My eyes are getting sore after seconds. Who on earth worked on this book to get it printed like this???

An excellent book. Mr Bodek understands the issue very well. I read Michael Lewis's book (excellent) on HFT, then Scot Patersons book on a similar theme then ended up at this book which really nails the issue. Any authority who reads all three books will realise there is a serious problem in the markets. Supply and demand in the old fashioned sense do not drive the markets any more. Basically - HFT's and MM's playing silly little games and sucking the life out of the markets will kill the markets unless all markets jointly fix the problem. One exchange, and a level playing field where research and analysis leads to "safer" investment decision making will suit us all much better. its hard enough as it is but these days buying shares in the markets is like throwing your money into a pool of sharks where what happens next is more down to psychological games being played out in the market. Shake-out's, bots selling 20 shares to knock a price down, delayed trades etc ... what chance does the guy on the street have?

After reading several of the conspiratorial books on HFT, this is a cool dispassionate look at the problem, more from the regulator's point of view. So not as compulsive a read but a lot more informative.The growth of HFT has driven all the fast trading into the dark pools, inaccessible except to those with a few zillions to spend on hardware and programmers. Anyone genuinely wishing to trade large volumes of stock needs to proceed very carefully, or the market will fall away apparently even before they hardly get started so we all loose out a few points from the value of our pensions schemes. The problem can be ultimately laid at the feet of the regulators who have allowed the problem to grow in the last couple of decades, apparently with the innocent aim of transferring greater profits to the stock markets themselves, but who now seem incapable of doing anything about it.

The main problem with these collected essays is that they overlap a lot. The main point is that speed of trading is not the issue, but trading types, queue jumping, hide and light and so on are, tools which give an unfair advantage to market users that know of these little-defined order types. The origin and effect of this is discussed in various ways by each article, so by the end you feel like you've read the same things 10 times, and either you've drunk the Kool Aid or you've started to feel slightly suspicious of the charismatic leader's repetitive, apocalyptic ramblings. The information on other order types was interesting, but despite the dire warnings about the subversion of the market the financial doom and gloom doesn't present much of a way for a normal trader to make the best of the status quo, so it's of limited use.