Joe Saluzzi: Broken Markets

This podcast was recorded ten days ago. It's publication was delayed a week due to last weekend's annual Peak Prosperity seminar.

As luck would have it, we had Joe Saluzzi lined up to record a podcast the day the news broke recently that the suspected culprit for the 2010 flash crash, Navinder Singh Sarao, had been arrested. Saluzzi is co-founder of Themis Trading LLC, long-time cautionary on the dangers of high-frequency algorithmic trading, and co-author of Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio.

In this discussion, Joe shares his suspicions about Sarao (a contributor to the crash, but highly unlikely to be the actual cause) and then provides his expert assessment of what has been done in the intervening years since the flash crash to safeguard the market against a similar failure (precious little). In his opinion, a winner-take-all high-tech arms race, clueless and toothless regulators, and central bank price distortion are conspiring to make us more vulnerable -- not less -- to another systemic breakdown:

What’s happened is the markets have evolved and they've obviously embraced computerization and technology. Some things have been very good for the markets and brought down cost. But regulators don’t seem to have evolved. They don’t seem to have caught up with times and they don’t necessarily have the eyes and ears out there to monitor things on a micro-second or nano-second level.

Just as an example: the SEC has proposed putting together a consolidated audit trail. This came about after the flash crash back in 2010. And we’re five years into this and they’re still out for bid, waiting for someone to bid on the project, and it’s nowhere near completion. And even when it does get completed, it’s still not going to be an all-encompassing view. They won’t be able to see futures, because the CFTC monitors that group. So it will be an incomplete set. It will be better than what they have now -- which is called Midas, basically a bunch of a direct data feeds that are supplied by the exchanges. And Midas, by the way, was built by a high frequency trading firm named Trade Works that still gets paid by the FCC over couple million dollars a year for this thing. So it makes you wonder how they're properly equipped to monitor it. And when you see cases like spoofing pop up and you’re like “How could they have missed it”? As you mentioned Eric Hunsader from Nanex, he sees this stuff all the time and he tweets it. I mean if I was a regulator I would just follow Eric and I’d say: "There’s an example right there, I don’t have to do the work, I’ll just follow Eric, he’s doing the work"


What happened to the price discovery mechanism? Is it really being set by fundamental investors who have looked at a company and its long term aspects, or is it now being set by Fed policy or some algorithm that’s tied to one currency pair or another?

And we're getting bubbles in certain areas because no one is really looking at valuations. All they care about is “Okay I made money today and I start fresh tomorrow because every night I go home flat and I start the game all over again”. That’s a scary thought. That’s a scary thought that these multi assets are now playing into each other and the correlation is so tight that when one market sneezes they all catch a cold really, really quickly.

I think we have to blame central bank intervention. How can we not? It’s all around the world. They’re setting interest rates at a ridiculous level. Quantitative easing is distorting all sorts of prices of assets. How do you price things anymore when you have such a giant manipulator out there?

Click the play button below to listen to Chris' interview with Joe Saluzzi (40m:53s)


This is a companion discussion topic for the original entry at

Its nice to hear from one of the point men on this fight.
He observed that (HFT) electronic market makers are good, and add value, while the (HFT) thieves who front-run trades and effectively steal money via being a few microseconds faster than us poor slobs at retail are bad, and subtract value, and need stamping out.  In other words, he has a nuanced view of the world, and one I share.

That is, not all HFT is bad.  And that IEX is a great place to get good fills, and that HFT participants (the good ones) do play at IEX, but they do so on a level playing field rather than having an advantage.

I also believe as he does that another flash crash is in our future.

It was awesome to hear his observations on how rapidly price moves against you if you are "sloppy" in your order submissions.

The only question I'd have asked him is, what would those same algorithms do if the fundamental owners suddenly decided to seriously distribute.  Would "official" buying be enough to stem the tide if the big owners of equities truly wanted out?

I believe that once the owners start selling the rallies for real, I think the world of algorithms will take us down much faster than it would have in the past, and any attempts at "official" buying will end up causing rallies that will be used as opportunities for the sellers to dump their holdings at higher prices than they otherwise would have received.

"Its all fun and games until somebody loses an eye."

This discussion was distressing to say the least. Watching my neighbors bust their ass, putting in a crop that may or may not come out of the ground, I could only bemoan the fact that none of the traders Mr. Saluzzi was speaking about had any direct connection to the assets that were being traded. Speculators have long had the upper hand in this sorry business because they have had the ability to acquire assets and meter them out as prices dictate. But for the poor “schmoe” with lots of  $$ tied up in equipment, time and labour, he is at a tremendous disadvantage to the pin striped wheeler-dealers dealing in EFT’s, futures, securities, bonds, equities and the likes. The risk to the primary producer is always the first risk and the biggest. To think that someone can pull in a million dollars because his algorithm and router can access prices a nano-second faster than the next guy, only leaves me with a sense of loss as to what is really at stake to those of us with our hands in the soil.
Yes, if you are farming more than 3500 acres, you are probably forced to hedge your product in order to even out the price cycles. But that’s a far cry from those boys in the glass towers plying their trade. It is all fun and games until somebody loses a crop! I guess reality is relative.

Voice of Captain Jean-Luc Picard:
"Set Classic Vinyl Time Displacement to T minus 45 years.


"Hellhound Train", seems appropriate.

For someone like me with little direct contact with the investing world - except of course that what happens in that realm is dictating the function and future of the currency we all depend upon to remain alive - podcasts like these have a fantastic quality.  This is not something real being described!  It has the feel of the imaginary, like a murky dream, too complex and confused to be real.  Something to wake up from. 
So I scratch my head.  Something unreal that provides zero sustenance but rather sucks resources away from the world, is defining what happens on our planet.  We people need to rescue ourselves from this situation.  It is our dependency on currency that puts us at risk.  What will still be here when the money is rendered useless?  For one thing, Uncletommy, farmers and their tools.  May they hold out long enough.  May they be well and strong enough to adapt to the missing inputs and grow food anyway.  Our grandparents knew how.

Here where I live, there will be water, soil, some seed, some very savvy neighbors who know how to garden, hunt and gather and my own, tiny village homestead.  Oh yes, and a LOT of hungry people.  Troublesome, that.

How may I increase my interface with what is real?  I want to forsake the unreal.  That fantasy realm is dead on its feet anyway.

On an inward level, I can be truthful about how much I have loved being alive here, whatever comes next.  The beauty I have been privileged to witness on this planet has made of me a wealthy soul, the wealthiest of souls, the soul that cannot stop singing about it.  How can the gift of this planet be understood without love?  I can feel my heart reaching arms around her.  There is a LOT of love!  Money will pass.  This will not. 

On the outward level, it is time now to go create a raised bed and plant the peas.  May I become a better lover.




This is not something real being described!  It has the feel of the imaginary, like a murky dream, too complex and confused to be real.  Something to wake up from.  
Meanwhile, infant and maternal mortality rates are on the rise in the US