Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio
By Sal Arnuk and Joseph Saluzzi
Quick Summary
A detailed critique of modern U.S. equity market structure by two veteran traders (Themis Trading), exposing how high-frequency trading, dark pools, exchange conflicts of interest, and regulatory failures have created a fragmented, opaque market that disadvantages long-term investors while enriching intermediaries who exploit speed and information advantages.
Executive Summary
Sal Arnuk and Joseph Saluzzi of Themis Trading were among the earliest and most vocal critics of high-frequency trading (HFT) and modern equity market structure. Their book systematically documents how the U.S. stock market transformed from a relatively simple system of a few exchanges into a complex web of over 50 trading venues, dark pools, and alternative trading systems. They argue this transformation, driven by regulatory changes (particularly Regulation NMS), exchange demutualization, and technological arms races, has created a market that is structurally rigged against ordinary investors.
Core Thesis
The modern U.S. equity market is "broken" because its structure prioritizes speed over fairness. HFT firms exploit colocation, private data feeds, rebate arbitrage, and predatory strategies (momentum ignition, layering, quote stuffing) to extract profits from slower participants -- primarily long-term investors and their institutional agents. The authors argue that exchanges, now publicly traded for-profit companies, have become "arms merchants" selling speed advantages, data, and colocation services to their HFT clients rather than serving their traditional role as neutral marketplaces.
Key Topics
HFT Strategies Exposed
Market making rebate arbitrage, statistical arbitrage, latency arbitrage, momentum ignition, and structural information advantages from colocation and private data feeds.
The Flash Crash of May 6, 2010
Detailed account of how market fragmentation and HFT contributed to the sudden 1,000-point Dow drop and the regulatory aftermath.
Dark Pools
How dark pools evolved from investor-protective crossing networks to venues where HFT firms prey on institutional order flow through internalization and latency arbitrage.
Regulatory Failures
The SEC's Concept Release on Market Structure, the inadequacy of "band-aid fixes" (circuit breakers, limit up/limit down), and the challenges of regulating a market that has outpaced regulators' technical understanding.
Blueprint for Reform
Proposals including a stock market transaction tax, limits on leverage, derivative transparency, and potentially creating a new parallel stock market designed for long-term investors.
Critical Assessment
Strengths
- Written by practitioners with deep market structure expertise
- Foreword by Senator Ted Kaufman lends policy credibility
- Detailed, evidence-based critique with specific examples
- One of the earliest comprehensive treatments of HFT's impact on retail and institutional investors
Limitations
- Advocacy tone may overstate some claims
- HFT defenders would argue the authors underweight the liquidity benefits of electronic market making
- Some market structure details have evolved since 2012 publication
- Reform proposals may be politically unrealistic
Conclusion
"Broken Markets" remains one of the most important books on modern equity market structure, providing the analytical ammunition for understanding how speed-based advantages disadvantage slower participants. Required reading for anyone seeking to understand why market structure matters for investment outcomes.
