Joe Saluzzi on High-Frequency Trading: The Equity Market Is Now Controlled by the Machines

Joe Saluzzi, co-founder of Themis Trading LLC and outspoken exchange expert, is concerned with how high-frequency trading has brought the capital markets into uncharted - and dangerous - territory.

"Things have changed," he cautions. With 50-70% of all trades being conducted by algorithms at micro-second time intervals, real human traders are increasingly challenged to understand how our markets actually work. "No longer do the technical patterns - that have lasted for years and years, and are written about all over - work anymore."

In the following interview, Joe and Chris plunge into "dark pools" and other poorly-understood elements of our now-machine-dominated financial exchanges. The current system is fraught with risks of further "flash crash"-like disruptions, and at a fundmental level, feels a lot like sanctioned theft by the deep-pocketed institutions who can outspend on technology and speed. This is an important interview for anyone involved in trading (professionally or personally), as well as investors who want to know how today's markets truly operate.

Click the play button below to listen to Chris' interview with Joe Saluzzi:

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In this podcast, Joe sheds light on:

  • How the complexity and pace of the current technology driving trades has become so complex that it has effectively evolved beyond our ability to fully understand its risks. 
  • Why the government agencies responsible for understanding and overseeing exchanges are woefully under-resourced and unprepared to be effective in this new era. 
  • How the average trader is destined to lose in today's market, while the big banks & HFT firms who can afford to win the arms race are making essentially-guaranteed profits.

As with our recent interviews with Jim RogersMarc Faber and Bill Fleckenstein, Jim ends the interview with his specific advice for the average trader/investor.

This is a companion discussion topic for the original entry at

Predatory Dark Pool: “Hey, Brokerman! Come trade with me and it’s free! Or I’ll give you a tiny rebate on each share you buy from me for your client!”

Brokerman: “Okay! I’ll do that! Especially since I charge my client half a cent a share! I’ll make $50,000 or $1 million on a 10 million shares!”

Predatory Dark Pool: "Great! Let’s do business! (Aside: “And I’ll sell these shares to you at 3 cents over the current market price that I’m buying them at, thus making me $200k to $250k!”)

Exchange: “Hey, pay me some money! And I’ll show (flash) you my client’s orders first, for half a second before showing it to everyone else!”

High Frequency Trading Box: “Sure! Thanks! (Aside: And now I’ll buy some shares right before these orders go on the market, and sell it to them for a few pennies more!”)

And the SEC is just sitting on its hands… Its regulators are looking for cushy jobs after they leave “public service.” Same with the politicians looking for campaign contributions…


Coinsedently a dutch kind of PBS frontline came out monday with a documentary about the flashcrash caused by all these high frequency traders.
Watch it at

use google translate for easy navigation as website is in dutch. On the same page there is also a 50min documentary about Quants the alchemists of wall street.

As CM already mentioned once this is also for me the reason i am not trading on the exchange anylonger. The trading is done by computers and not by investors.


Another great podcast interview!
A couple of questions;

  1. Is there a reason that these podcasts are not available in iTunes? 
  2. How much of the market liquidity typically attributed to Fed Q.E. is actually a product of high-frequency (velocity) trading?
  3. Is the current rise in commodity prices really a function of monetary inflation, or is it merely a by-product of every player in the market "nickle and diming" each other at exponentially increasing speed?
Thanks for the great content....Jeff

I wrote to my friends about this back when the Flash Crash happenned.   The FED and SEC are playing with fire and gasoline.   Chaotic behavior can emerge in a trading system like this that no player can predict (see Mandelbrot).   So this chaotic frequency trading combined with FED loose money is the worst of both worlds.  Throttling functions could easily be programmed to slow trades, but the dummies think they are Masters of the Universe who can rig the system.

JAG - No good reason these aren’t on iTunes yet. We’ll remedy that quickly.Glad to hear you’re enjoying these interviews.

Fantastic stuff!  I’m just amazed at the number of interviews, the caliber of the people interviewed, and the quality of the information contained therein.  Great job, Chris and Adam!
I’m equally amazed (albeit in a negative rather than a positive way) at how these low life Wall Street cutthroats are being allowed to run amuck with nary a hint of restraint.  We’ve known it’s been bad for a while now.  And the more we learn, the more we realize how bad it is.  But there seem to be no limit to how bad it’s getting.

I heard on the news the other day of how many individuals had received fraudulent tax credits for electric cars … including 29 prisoners!!!  The IRS said they were going to “aggressively pursue” these individuals to recover the purloined funds.  Aggressively pursue them!?!  You mean like threaten them with jail?!?  What an absolute joke!!!  Our justice system throws people in jail at the drop of a hat for victimless crimes but if you steal billions or even trillions, impoverish millions, cause people to lose jobs, lose homes, destroy families, destroy marriages, destroy lives, cripple the nation, etc., you’re allowed to mosey along on your merry way because the authorities are ostensibly too busy or too underfunded to do anything about it.  Outrageous!!!     


This was a very informative interview.
One observation pointed out was the markets have become “cross correlated”. Basically they are all moving in the same direction. Another market expert made the same observation several years ago and attributed this to Central Banks acting globally to flood the markets with liquidity to prevent market crashes, and keep the system running .

I have an advanced degree in engineering concentrating on signal processing. When I performed an analysis on ANY of the markets, there is a common conclusion: THEY ARE ALL MATHEMATICALLY UNSTABLE. This makes sense since any growth of a signal immediately puts the roots of the fundamental differential equasion in the right hand plane. Stability, therefore, happens when markets sell off, not rise. Long term stability will be achieved when the markets converge to $0.

[quote=Adam]JAG - No good reason these aren’t on iTunes yet. We’ll remedy that quickly.
Thank you!!!
I’ve yet to listen to one. I read the transcripts.

Fantastic! Joe and Chris together! I always try to catch Joe when he is on TV, via YouTube, and his is the only Twitter I follow (link below).


JAG - No good reason these aren’t on iTunes yet. We’ll remedy that quickly.
Thank you!!!
Thank you +1 !!
Is high frequency trading unique to the US market? Is it as bad in other foreign (to the US) markets?

Always fun to be the only dissenter :slight_smile:
I’d just point out the following:  

  1. Instinet was the first substantial ECN, according to Joe.  Where is it now?  I believe that it was superceded by the superior technology of Island and Archipelago.  At least, the market made its choice.  And now that those have been purchased by NASDAQ and NYSE, newer electronic exchanges like Bats, Edge, and other venues are displacing their dominance.  Technology and competition marches on.

  2. I recently turned 60, and I’ve seen a lot of these controversies in the market place.  Without fail, they are finally decided not by the facts but by a power struggle amongst those whose ox is being gored, and those who are succeeding at new techniques, technologies, etc.  Joe is talking his book.  He’s a “best execution” firm.  He’s having trouble being best as technology changes rapidly.  He always leads with how deep his technology roots are.  That’s to counter criticism that he hasn’t kept up to date.  I strongly recommend watching the entire video from last June’s SEC panel regarding high frequency trading.  Joe’s partner, Sol Arnuk, is one of the participants.  For me, the most telling, most neutral fact delivered at that panel was Wellington Management’s statement about how dramatically trading costs have come down over the last 4 years, with extreme positive long term impact for people who invest with money managers like Wellington.  There are also some comments by panelists about the availability of best of breed technology, and the relative quality of Themis technology, if you listen to the whole thing you’ll hear these comments and be able to draw your own conclusions.

Are there problems with certain high frequency trading practices?  Absolutely!  But they are easy to deal with without abandoning the overwhelmingly positive impact of transparency and competition among legitimate market participants.  Red herring arguments about non-existent “flash order” advantages, suspicious Nanex-reported quote patterns, and the like, distract from the real struggle.  

Regarding the flash crash, the order cited by the SEC report as triggering the most severe part of the downturn was executed with exactly the algorithmic profile of program trading during the 1987 crash.  That is, the execution algorithm was adjusting the size of the orders it was sending to be proportional to recent volume.  As they induced greatly increased volume, they increased the size of the next increment to their order.  Folks, this is exponential in its effect.  The market was down over 3% when this process began.  The market recovered most of the loss encountered during this sales program.  Compare this to 1987, when it took many months to recover the equivalent percentage.  High frequency traders and algorithms reacted in a positive way, not a negative way, to the near-complete disappearance of liquidity during the market meltdown, and are the primary reason that the market recovered most of the panic losses.

I’m always skeptical of taking advice from someone who’s economic interest is served by the process he advocates.  And as is probably obvious, I have the same conflict as Joe, just on the other side of the argument.  I highly recommend researching the facts for yourself, if you are truly interested in regulating HFT for the maximum benefit of all market participants.

No its not unique to the US market. I’ve seen reports suggesting that 25-30% of trades on the TSE (Toronto, Canada) market are high frequency trades and the highest volume stocks usually show a penny or two bid/ask spreads.
It would be good to know how much of that HFT is placed on interlisted stocks (NYSE, AMEX) where there is the additional arbitrage available from forex.

S.Ful. Thanks for your comments.  You obviously spend alot of time listening to what my partner, Sal Arnuk, and I have to say.  Just so you know, many of our comments are direct reflections of what our institutional clients share with us.  As you probably know, we are a small firm but we have taken on this challenge of market structure because we feel that this side of the story needs to be told.  The HFT side has been well publicized - they shrink spreads, add liquidity and trading costs have never been lower.  While that argument may satisfy an unsophisticated politician, we think the retail and institutional are owed a better explanation of what has happened to our equity market particularly since Reg NMS was fully implemented in 2007.    You speak of transparency and competition amongst market participants.  We are all for that but can you please explain the value of having 13 exchanges and over 40 dark pools.  Does this not create unnecessary fragmentation that HFT’s are more than happy to profit from?  Why are 32% of the trades printed on the FINRA TRF?  Don’t you think all this off exchange trading is actually hurting the price discovery process?
We are not interested in over regulation.  But when we spot problems, we point them out.  When we wrote a paper last year titled “Data Theft on Wall Street”, we found that exchanges were releasing some information on institutional orders that clients thought was private information.  We were quickly criticized by the usual suspects claiming we didn’t have all the facts.  Well, we must have had enough, because the practice that we highlighted was changed after there was an institutional uproar.
This story is not about me, Sal or my firm.  The story is about the long term survival of our equity markets.  The “Flash Crash”, flash orders, co-location, private data feeds, cross ownership of ATS’s, 90% cancellation ratios, etc.  all have severely eroded the confidence of many traditional investors.  And guys like you who continue to spew the usual HFT propaganda and act like that traffic cop I spoke of in my interview (“Nothing to see here folks, move along”) just want to keep the status quo because it has been a tremendous money maker.   Well, based on the reaction to Chris’ interview with me, it looks like alot of people want to know what is going on behind that yellow caution tape.  

[quote=s.ful]Always fun to be the only dissenter :slight_smile:
As far as trading costs coming down, somehow when trading costs were higher but HFT was not a major factor in the markets, it was a lot easier for the reasonably competent retail investor to make money.  The proof is in the pudding.  I’ll take the higher trading costs in place of HFT any day.  I’d be interested to know if you think HFT has truly benefited the bottom line of the majority of institutional and retail investors and if you’re willing to say yes, would you put your name out there just like Joe has?  If you have the courage of your conviction, I would think you’d want your name known. 

S. Ful, Thank you for your comments. A couple of questions for you: 

  1. As a retail INVESTOR (not a trader) how does HFT Benefit me and the millions like me?
  2. When the flash crash happened (forget for a moment why it happened since that is a known unknown), how did HFT help the market handle that volitility? Please cite publicly available info to support your answer.
  3. How does trading billions of shares of CITI back an forth over and over create wealth for an INVESTOR (not a trader)?
    I realize Joe is talking his book. We all talk our book. My book used to be retail INVESTING (not trading). And from where I sit, HFT has contributed to the destruction of retail INVESTING (not trading).

I think a lot of little people like me have realized that the last 10 years have basically returned nothing, and when we read that most trades in stocks are by HFTs doing tiny penny pinches on millions of shares, it sounds like any chump who wants to play is gonna get churned and chummed for the sharks.
I don’t see a lot of little people investing in Russia these days. Or in Mexico… If I think the game is rigged against me, why would I play?


Want to know where the exchange rate is going to move in the next few months or what the benefits of a floating exchange rate.Exchange rates, like any other commodity, are based on supply and demand for particular forms of currency. Euro Exchange Rate