Joseph Saluzzi thinks high-frequency trading is ruining our stock markets.
A founder of the institutional brokerage firm Themis Trading, Saluzzi is an outspoken critic of the practice. The ultra-fast, computerized purchase and sale of securities offers little benefit to run-of-the-mill investors who don’t have supercomputers, says Saluzzi -- whose firm competes with high frequency traders. More than that, Saluzzi argues that high-frequency trading can wreak havoc in the markets -- he says it helped fuel the recent technical glitches that plagued Facebook’s initial public offering on the Nasdaq stock exchange in May. The result, he says, is mom-and-pop investors get scared and begin to flee.
This week Saluzzi published a book with his co-founder Sal Arnuk on the subject -- “Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio.” The Huffington Post caught up with Saluzzi to talk about high-speed trading, market reform, and what it would take to make everyday investors feel safe again.
The Huffington Post: What prompted you to write the book?
Joseph Saluzzi: Our name is out there as quote-unquote critics of high frequency trading. We like to call ourselves critics of stock-market structure. High-frequency trading is just a strategy that [a faulty] market structure allows.
THP: What’s wrong with the current structure?
JS: The purpose of the stock market is supposed to be capital raising and capital formation. Investors are supposed to come, see what’s going and say, "You know what, I like that company, I can invest and I’m going to hold the stock." Fifteen or 20 years ago, that’s what you had. Now ... the whole model for capital formation has gotten twisted into a short-term trading [system] where an average holding period for a high-frequency trader is seconds, not days or years.
THP: Meaning high frequency traders sell stocks almost as soon as they buy them. What does that mean for the stock market?
JS: It turns it into a casino. People say, "The stock market doesn’t make any sense anymore." They’re tired. [They wonder] "What’s going on -- why is there is so much volatility?" People know something’s wrong, but they don’t know exactly what.
THP: Were things different before the age of high frequency trading?
JS: Back then, there were inventory managers ... there were people running the store. Now there’s no inventory in the store anymore -- no one has a vested interest in the [performance of a] stock. You’ve lost the whole point of what a stock exchange is supposed to do. Which is identify undervalued assets, identify stocks that you think are going to grow.
THP: So what’s the end result?
JS: Continued loss of trust and confidence in the stock markets. And that is the worst thing you can do. Because you don’t build trust and confidence overnight, but when you lose it, it goes quick. And things like the [failed] BATS IPO and the Facebook IPO and the flash crash [of 2010] have just eroded confidence more and more. So that people are throwing up their hands and saying, "You know what? I’m not going to play. I’m not going to buy stocks anymore." They’re walking away.
THP: So you think high frequency trading directly leads to instability in the markets?
JS: You have potential system crashes now. The bottom line is, when you have speed in the market and the technological infrastructure [at the exchanges] can’t keep up, you’re going to have events. So an event is the flash crash, an event is the Facebook IPO.
THP: You’re not going to get rid of technology...
JS: No, you don't go backwards. You don't put the genie back in the bottle. We’re not looking to slow down technology. Maybe we could put a speed limit in place [on trading]. This would get rid of a lot of noise.
THP: Big picture, what needs to happen?
JS: You have to develop a market structure that makes sense. That goes back to the root of what a stock exchange is supposed to be. Investors are so frustrated by the casino mentality, they want to value stocks appropriately.
THP: And what if markets aren’t reformed?
JS: We’re more susceptible to these [market instability] events. We continue to erode trust. And then what’s left? The locusts have come in and stripped the field bare. There’s nothing left to eat here and the high-frequency traders are going to move on. But who’s going to be left holding the bag? We are. The only way you drive in mom-and-pop investors is if they feel like they're going to get a fair shake.
This interview has been edited for clarity and length.