Felix Salmon
190 μ¢¤³£ ¬μμ¬
market events per day. Its computers
Áag about one percent o those—500
million events per day—and a single
Áag can create weeks o work for a team
o regulatory investigators. The vast
majority o suspicious transactions
likely go uninvestigated.
A couple o glimmers o hope
remain. The European Union has made
decent strides in improving investor
protections with a 2018 directive called
MiFID II, a new version o the Markets
in Financial Instruments Directive,
which forces exchanges to be much
more transparent about conÁicts o
interest in their disclosures to investors.
In 2012, France implemented a 0.1
percent tax on the value o canceled or
modiÄed orders, which is a strong disin-
centive to engage in quote stung or
spooÄng. And there are even occasional
discussions, so far conÄned largely to
academia, about moving to so-called
discontinuous markets, where stocks
would be allowed to trade a mere ten
times per second—slow enough that ̈μ¡s
could not front-run orders.
Ironically, the greatest hope o all
may be that the technological arms race
between ̈μ¡s and exchanges will
become so astronomically expensive
that it will force the world’s biggest
exchanges into megamergers with one
another, resulting in a new global
monopoly spanning countries and
markets. The idea o a single trading
venue for stocks, bonds, currencies, and
derivatives, operating 24 hours a day,
oblivious not only to regulators but also
to time zones, admittedly sounds
terrifyingly dystopian. But the lesson o
Mattli’s book is that sometimes giants
can be relatively benign. It is when they
break apart that chaos results.∂This practice was, as Mattli notes, a
patent violation o securities law. But
instead o punishing the £Ý¤, the
regulators simply waited for the exchange
to ask permission, which eventually it
did. Then the ¤ granted that permis-
sion. Other cases involve special order
types, or ¢¡s—extremely arcane forms
o placing a trade, designed to give ̈μ¡s
an extra advantage over real-money
investors. On rare occasions, the ¤ has
levied Änes on exchanges for implement-
ing ¢¡s without permission, but the
Änes are tiny compared with the proÄts
the ¢¡s generate.
Mattli has a whole chapter on various
forms o market manipulation that are
unequivocally harmful but ubiquitous.
There are the ways that banks have
allowed ̈μ¡s into dark pools even after
promising large investors that they
would not, for instance. There is quote
stung—placing millions o essentially
fake orders for stocks, at prices far
enough removed from the market price
that the orders won’t ever be Älled—
which makes it impossible to see how
much liquidity there is in any given
security. That happens 125 times per
day, on average, across 75 percent o all
U.S.-listed equities. And there is spoof-
ing—investors placing and then imme-
diately withdrawing orders near the
market price that they never actually
intended to see through—which also
happens every day in every major stock.
The nefarious activity is clear to all,
as is the lack o any real enforcement.
The regulators are not only captured by
the big banks; they are also completely out
o their depth technologically. By some
counts, the Financial Industry Regula-
tory Authority, a private regulator
overseen by the ¤, monitors 50 billion