Foreign Affairs - 11.2019 - 12.2019

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FELIX SALMON is Chief Financial Correspon-
dent for Axios.


The Virtue of


Monopoly


Why the Stock Market


Stopped Working


Felix Salmon


Darkness by Design: The Hidden Power in
Global Capital Markets
BY WALTER MATTLI. Princeton
University Press, 2019, 264 pp.


Y


ou’ve heard the story many
times. The stock market is
rigged. A highly secretive group
o‘ opaque Änancial institutions is
making billions o‘ dollars from socially
useless high-frequency trading—plac-
ing and withdrawing stock orders
hundreds o‘ thousands o‘ times per
second—with all those proÄts coming,
in one way or another, from the rest o‘
us. The biggest losers o‘ all? Small,
mom-and-pop, or retail, investors, who
cannot hope to compete.
Perhaps the best-known proponent
o‘ this narrative is the author and
Änancial journalist Michael Lewis. In
his 2014 book, Flash Boys, Lewis painted
the stock market as a battle in which
the good guys were losing to the bad
guys. The book sold well and even
instigated a handful o‘ criminal investi-
gations into high-frequency traders


( ̈μ¡s), none o‘ which bore any visible
fruit. For the truth is that even with
the rise o– high-frequency trading since
the early years o‘ this century, actual
mom-and-pop investors have never had
it so good. Armed with online accounts
oering trades for minuscule fees, they
see their transactions go through instan-
taneously, without the sorts o‘ delays
that can allow the market to move against
them before their order is Älled. I‘ the
stock market is broken, it’s not broken in
a way that is obvious to retail investors.
Yet Lewis was right to worry about
̈μ¡s; he just misidentiÄed their main
victims. This is the revelation at the
heart o– Walter Mattli’s masterful
Darkness by Design. Great books make you
reexamine your assumptions, and this one
delivers in spades. It not only oers a
compelling critique o– how the stock
market has evolved over the past 15
years; it also forces readers to reconsider
the idea that competition is good and
monopolies are bad. What has truly tilted
the playing Äeld in favor o‘ a handful o‘
Änancial behemoths and ̈μ¡s, Mattli
argues, is the growing fragmentation o‘
stock markets, a process actively en-
couraged by misguided government
regulators. The biggest losers o‘ that
development are not retail investors, who
tend to be fairly well-o, but pension
funds, insurance companies, and other
major institutional investors.
Those Änancial behemoths are, in
fact, the proverbial little guy. One o‘ the
paradoxes o“ Änancial terminology is
that terms such as “retail investor” and
“small business owner” connote the
relatively impecunious, whereas in fact
those investors and owners are dispro-
portionately likely to be in the top one
percent o‘ the wealth distribution. The
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