Foreign Affairs - 11.2019 - 12.2019

The Virtue of Monopoly

November/December 2019 189

markets and jurisdictions. No regulator

can hope to keep up, so these highly

secretive companies e
ectively operate

with no code, no morals, and no values.

Their only motivation is proÄt.

Investors once hoped that so-called

dark pools would o
er a way out o‘ the

depth problem. Dark pools exploded in

popularity after 2005, since large

institutions could no longer count on

the £Ý˜¤’s specialists to provide ample

liquidity and found themselves being

outpaced by ̈μ¡˜ on smaller exchanges.

Because orders placed in dark pools are

not visible to other traders until they

have been executed, the hope was that

̈μ¡s would not be able to make money

front-running these transactions. In

reality, however, even dark pools are

infested with ̈μ¡˜, whose trade volume

the pools rely on to remain proÄtable.

HIGHFREQUENCY MANIPULATORS

The ̈μ¡s are in control o‘ the markets

now. They are the must-have customers

for any exchange, because they drive

most o‘ the volume and liquidity in the

market. The exchanges, many o‘ them

created to serve the ̈μ¡s, cannot

themselves prevent the latter’s domi-

nance. Nor can regulators, who are

conÄned to single markets in single

countries, whereas ̈μ¡s roam globally.

By the time a regulator has found a

vaguely suspicious transaction, the

algorithms ̈μ¡s use have long since

moved on to something new.

Even when blatantly illegal activity

happens right under their noses, regula-

tors generally ignore it. From 2006 to

2010, the £Ý˜¤ gave ̈μ¡s a physical

trading-speed advantage by openly

allowing them to place their trading

computers right inside the exchange.

the Ärst stock ticker (1867) and the Ärst
trading-Áoor telephones (1878) to a
system capable o‘ processing four billion
shares a day (1999). No other stock
exchange in the world could come close.
Today’s internalization, by contrast,
has created a classic tragedy o‘ the
commons: big banks free-ride on the
£Ý˜¤’s ticker, trading at the prices it
publishes in real time, without contribut-
ing to its liquidity. The consequences
became clear during the “Áash crash” o‘
May 2010, when billions o‘ dollars o‘
value suddenly evaporated, only to
reappear minutes later. Without the deep
liquidity and oversight o‘ the old £Ý˜¤
there was no one to prevent thousands o‘
stocks from collectively plunging and
then rebounding. Worse still, that kind o‘
event happens every day in individual
stocks; the only unusual thing about the
Áash crash was that it took place in many
stocks simultaneously.
As the Áash crash proved, today’s
market lacks depth. Large investors
want to move billions o‘ dollars in and
out o‘ the stock market but cannot do
so without prices moving against them,
their orders being front-run by ̈μ¡s.
The ̈μ¡s who beneÄt from this system
are the embodiment o‘ what Adair
Turner, then chair o‘ the United King-
dom’s Financial Services Authority,
famously characterized as “socially
useless” Änancial activity. They reinvest
their proÄts into machines that can
trade in microseconds rather than
milliseconds; those proÄts would surely
serve a higher purpose i‘ they were
invested in other parts o‘ the economy.
And as these outÄts become bigger and
more sophisticated, they trade increas-
ingly complex Änancial products—all
invented by banks—across dozens o‘