Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market into a Casino Jim McTague Vice President, Publisher Tim Moore Cover Designer Chuti Prasertsith Associate Publisher and Director of Marketing Amy Neidlinger Managing Editor Kristy Hart Executive Editor Jim Boyd Copy Editor Gill Editorial Services Editorial Assistant Pamela Boland Proofreader Water Crest Publishing Development Editor Russ Hall Senior Indexer Cheryl Lenser Operations Manager Gina Kanouse Senior Compositor Gloria Schurick Senior Marketing Manager Julie Phifer Manufacturing Buyer Dan Uhrig Project Editor Anne Goebel Publicity Manager Laura Czaja Assistant Marketing Manager Megan Colvin © 2011 by Pearson Education, Inc Publishing as FT Press Upper Saddle River, New Jersey 07458 This book is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services or advice by publishing this book Each individual situation is unique Thus, if legal or financial advice or other expert assistance is required in a specific situation, the services of a competent professional should be sought to ensure that the situation has been evaluated carefully and appropriately The author and the publisher disclaim any liability, loss, or risk resulting directly or indirectly, from the use or application of any of the contents of this book FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases or special sales For more information, please contact U.S Corporate and Government Sales, 1-800-382-3419, corpsales@pearsontechgroup.com For sales outside the U.S., please contact International Sales at international@pearson.com Company and product names mentioned herein are the trademarks or registered trademarks of their respective owners All rights reserved No part of this book may be reproduced, in any form or by any means, without permission in writing from the publisher Printed in the United States of America First Printing March 2011 Pearson Education LTD Pearson Education Australia PTY, Limited Pearson Education Singapore, Pte Ltd Pearson Education Asia, Ltd Pearson Education Canada, Ltd Pearson Educatión de Mexico, S.A de C.V Pearson Education—Japan Pearson Education Malaysia, Pte Ltd Library of Congress Cataloging-in-Publication Data: McTague, Jim, 1949Crapshoot investing : how tech-savvy traders and clueless regulators turned the stock market into a casino / Jim McTague p cm ISBN 978-0-13-259968-9 (hardback : alk paper) Investment analysis—United States Stock exchanges—Law and legislation—United States Electronic trading of securities Stocks—Law and legislation—United States Capital market—United States I Title HG4529.M397 2011 332.64'273—dc22 2010051301 ISBN-10: 0-13-259968-6 ISBN-13: 978-0-13-259968-9 To my wife, Rachel, for her understanding, help, and encouragement This page intentionally left blank Contents Acknowledgments vii About the Author viii Introduction Chapter 1: Strange Encounters 11 Chapter 2: Not Your Grandma’s Market 27 Chapter 3: Screaming Headlines 39 Chapter 4: Accidental Senator 47 Chapter 5: Flash Crash 61 Chapter 6: Shock and Awe 81 Chapter 7: Poster Child 85 Chapter 8: Accident Investigation 91 Chapter 9: The Trouble with Mary—and Gary 97 Chapter 10: The Road to Ruin 105 Chapter 11: Busted! 113 Chapter 12: Precursor 125 Chapter 13: Birth of High-Frequency Trading 135 Chapter 14: Evil Geniuses? 149 Chapter 15: Dirty Rotten Scoundrels 165 Chapter 16: Dark Pools 171 Chapter 17: Volatility Villains 175 vi CRAPSHOOT INVESTING Chapter 18: The Investigation 183 Chapter 19: The Vigilantes 193 Chapter 20: The Tide Turns 199 Chapter 21: Letter Bomb 207 Chapter 22: Scapegoat 213 Chapter 23: The Real Culprits 221 Chapter 24: Investing in a Shark-Infested Market 229 Index 237 Acknowledgments I want to thank my most memorable college professor and lifelong friend, Francis Burch, S.J., a brilliant scholar and author who encouraged me to become a columnist and an author This book was produced under a tight deadline to bring very important information to the attention of the investing public I would not have been able to tackle the project without the encouragement of my colleagues at Barron’s: Editor and President Edwin Finn; Managing Editor Richard Rescigno; and Assistant Managing Editor Phil Roosevelt I also owe thanks to my officemate Tom Donlan, our editorialist and the author of several books, for his suggestions, especially those regarding Harvey Houtkin Chris Anderson, one of the smartest men on Wall Street, provided me with insights about the changing nature of the equities market Ken Safian, another Wall Street legend, offered invaluable insights about high-frequency trading Jamie Selway of Investment Technology Group LLC shared insights on market structure Will Ackworth of the Futures Industry Association was exceedingly generous in sharing his knowledge about the history of the commodities markets Wayne Lee of NASDAQ, Ray Pellecchia of the NYSE Euronext, John Heine of the Securities and Exchange Commission, and Dan Chicoine of TD Ameritrade were especially helpful in connecting with market experts I also want to thank the many lawyers, regulators, and traders who spoke to me about market structure and high-frequency trading on deep background Finally, I offer special thanks to my daughter Alex, a patent litigator, and Bob Schewd of WilmerHale, a brilliant literary contract attorney, for assisting me in my negotiations with the publisher About the Author Jim McTague has been Washington Editor of Barron’s Magazine since 1994—a post that gives him privileged access to key players in Washington and on Wall Street A credentialed White House and Capitol Hill correspondent, he’s covered every administration since the first President Bush McTague has appeared on NBC, CNN, CNBC, MSNBC, FOX, and is a frequent guest on FOX Business News His extensive analysis of the underground economy in 2005 exploded the myth that illegal aliens were a small percentage of the U.S population, triggering today’s border security debate McTague holds an MA in English from Pennsylvania State University and a BS in English from St Joseph’s University in Philadelphia Introduction The stock market has changed radically since 2005, yet few persons realized the greatness of the seismic shift until May 6, 2010, when the major averages collapsed over the course of 10 minutes The public suddenly realized that a venue designed to efficiently move capital from investors to the most promising enterprises had become as risky as a Las Vegas casino This book is the story of well-intentioned but disastrously wrong-headed decisions by Congress and securities regulators that resulted in the destruction of a great American institution and possible long-lasting damage to the entire U.S economy Fixing this mess is without a doubt the most important challenge for U.S policy makers in the years ahead, yet few of them understand this They are still looking backward at the credit crisis of 2007 to 2008 and fail to see the bigger threat that is right before their eyes Just prior to May during the first quarter of 2010, the all-clear siren sounded for shell-shocked Wall Street investors All seemed well with the stock market The major stock indexes, which had hit 12-year lows in March 2009 in the midst of the turbulent Great Recession, miraculously recovered by 74% the same month a year later Investors once again were able to look at the returns in their retirement accounts without becoming physically ill Confidence in the stock market, which had been badly shaken during the market meltdown of the previous two years, began to strengthen In April 2010, retail investors began shifting money from safe havens like gold, commodities, and treasury bonds into equities and equity mutual funds, which was good news for cash-starved American enterprises 234 CRAPSHOOT INVESTING markets Barry Ritholtz’s “Big Picture” blog has excellent discussions about the broad economy Ed Yardeni’s subscription newsletter is another excellent read Asset manager John Maulden’s “Outside the Box” is a fine site for investors seeking contrarian viewpoints Investors should go to the Web site of Cumberland Advisors and sign up at no charge for David Kotok’s market musings PNC chief economist Stuart Hoffman is regularly prescient, and his reports are available free-of-charge on the banking company’s Web site William Dunkelberg’s analysis of small business conditions is an important market bellwether He posts his analysis on the site of the National Federation of Independent Business And the Association of American Railroads posts to the Web on a monthly basis its “Rail Time Indicators” report, which is perused by Buffet and Alan Greenspan and other financial experts for clues about the direction of the economy Yahoo! Finance lists the star analysts for each company I use a service that gives me access to their research In addition to important news, both Barron’s and The Wall Street Journal have excellent online tools to aid investors in conducting their fundamental research, like a basic version of StockGrader The major stock and commodities exchanges also provide useful data and educational material Investing is hard work Warren Buffet did not become the world’s most successful investor by relying on the representations of others I recommend that investors studiously review a company’s SEC filings, which are available online at the agency’s Web site And before investing, an investor should know what the short interest is in a stock; what the spread in its bid and asked price in the stock has been for the past year; analysts’ expectations for earnings; and similar information for other stocks in the same sector But there is no sure-fire method for a retail investor to beat the market It has become a shark tank, and we are the anchovies Every time you buy or sell a stock, you are rolling the dice and hoping for a good outcome CHAPTER 24 • INVESTING IN A SHARK-INFESTED MARKET 235 Endnotes Report of the staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues, “Preliminary Findings Regarding the Market Events of May 6, 2010.” Washington, DC (2010): 28–30 This page intentionally left blank INDEX A Accenture, aftermath of Flash Crash, 85-87, 90 Agnew, Spiro, 101 AIG, 98 Aldridge, Irene, 44 Aleynikov, Sergey, 39, 42 All-Tech, 137 Alternative Trading Systems (ATSs), 93 American Banknote Company, 117 American Stock Exchange, 33, 76 analysts, lack of, 189-191 Angel, James J., 194 arbitrage, 161-162 arbitrage opportunities, 70 Archipelago, 33 Arnuk, Sal, 11-25, 44-45, 61, 217 Atkins, Paul, 145-146 ATSs (Alternative Trading Systems), 93 regulation of, 139-144 Australia (film), 78 automated liquidity provision, 161 Automatic Trading Systems (ATSs), 93, 139-144 Aykroyd, Dan, 29 B Bachus, Spencer, 187 Baker, Jim, 130 BATS (Better Alternative Trading System) Exchange, 78 Bee, Samantha, 44 Berkeley, Alfred, 173 Biden, Joe, 47-49, 52-53 “Big Picture” blog (Ritholtz), 234 Birk, Roger, 116 Black Monday (October 19, 1987), 125-133, 179 Blair, Bruce, 160 Blankfein, Lloyd, 99 Blodgett, Henry, 189-190 Bloomberg, Michael, 100 Boesky, Ivan, 126 Boggs, Caleb, 48 237 238 Bookstaber, Richard, 157 Born, Brooksley, 99 Boston Stock Exchange, 33 BP oil spill (Deepwater Horizon), 67 Brady Commission, 128 Brady, Nicholas, 83, 128 broken trades after Flash Crash, 83, 225 brokerage houses, internal trades, 31-32 Brown, Alistair, 17 Brown, Gordon, 66 Budge, Hamer, 107 Buffett, Warren, 234 Bulgaria Confidential (newspaper), 42 Bush, George H.W., 102 Bush, George W., 50 busted trades after Flash Crash, 88 buttonwood trees, 168 C Cameron, David, 66 Canaday, Ed, 41 capital crisis of 1969-70, 105-111 Casey, William, 120 CBOT (Chicago Board of Trade), 28-30 Cembalest, Michael, 207-208 CFTC (Commodities Futures Trading Commission), 27 Flash Crash report, 213-227 immediate reaction to Flash Crash, 82 INDEX investigation of Flash Crash, 183, 187 consolidated tape delays, 202-204 quick fix rules after Flash Crash, 85-87, 90 CFTC-SEC Joint Advisory Committee Accenture testifying before, 85-90 investigation of Flash Crash, 91-95 Chicago Board of Trade (CBOT), 28-30 Chicago Mercantile Exchange (CME), 28-30 Chilton, Bart, 214 Christie, William, 139 circuit breaker rule, 188 circuit breakers, 63-64, 89 Citigroup, 166 Clinton, Bill, 53, 97, 100-102, 143 Clinton, Hillary, 100 Close Encounters of the Third Kind (film), 49 CME (Chicago Mercantile Exchange), 28-30 collocated servers, 17, 22, 34 collocation, origins of, 165-169 commission structure, fixed commissions, 118-120 commodities exchanges correlation with equities exchanges, 94 history in United States, 27-30 unification with equities exchanges, 36, 70 INDEX Commodities Futures Trading Commission See CFTC competition among stock exchanges, creating, 116-118 computers, increasing role in stock market, 115 Congress immediate reaction to Flash Crash, 81-84 pressure on SEC by, 47-59 Conley, Joan C., 194 Connaughton, Jeffrey, 49-53, 193, 210 consolidated tape, 8, 12, 31 delay of, 72, 199-205, 225-226 lack of during capital crisis of 1969-70, 110 Consolidated Tape Association, 165 consolidation of commodities exchanges, 30 of equities exchanges, 33 Cook, G Bradford, 111 correlation, 68 Cox, Christopher, 50-51, 58 Craig, Pamela J., 85-87, 90 Cramer, Jim, 207 crashes See Flash Crash credit default swaps, 98 Cronin, Kevin, 186 Cummings, David, 216 customers, influx of during captial crisis of 1969-70, 106-108 D Daily Show (television program), 44 Damgard, John, 101 239 dark pools, 12, 32, 74, 94, 141, 171-174 DARPA (Defense Advanced Research Projects Agency), 158 day trading See high-frequency trading dealers, 133 decimal pricing, 144 Deepwater Horizon oil spill, 67 Defense Advanced Research Projects Agency (DARPA), 158 Deja.com, 151 delay of consolidated tape, 72, 199-205, 225-226 Depository Trust and Clearing Corporation, 117 derivatives, predictions concerning, 98 Designated Order Turnaround (DOT), 132 Dhar, Vasant, 167 Diebold, 195 Direct Edge, flash orders, 42-43 dividend capture, 230-231 Dividend Capture: From Theory to Practical Application (Hartzell and Sorathia), 231 Division of Risk, Strategy and Financial Innovation (SEC), formation of, 97 DJIA (Dow Jones Industrial Average) on Black Monday (October 19, 1987), 125-133 Flash Crash, details of, 61-79 Great Recession, details of, volatility, Dodd, Chris, 55, 186-187 240 Dodd, David, 177 Dodd-Frank Act, 103, 187, 204 Doll, Robert, Donaldson, William H., 145 Donovan, Jeffrey, 199 DOT (Designated Order Turnaround), 132 Dow Jones Industrial Average See DJIA Dreyfuss, Richard, 49 Duhigg, Charles, 43 Dunkelberg, William, 234 Durden, Tyler See Ivandjiiski, Dan, 41-42 E E-Mini futures contracts in Flash Crash, 68-69, 215-219 ECNs (electronic communications networks), 94, 142 Edelman, Asher, 136 Engelberg, Jeff, 191 Equinix, 167 equities exchanges correlation with commodities exchanges, 94 Flash Crash, details of, 61-79 Regulation NMS changes to, 21, 31-37 unification with commodities exchanges, 36, 70 erosion of investor confidence, 207-210 ETFs (exchange-traded funds), 185 in Flash Crash, 76-77 mutual funds versus, 232 INDEX ethics issues in Flash Crash investigation, 193-198 Eurex, 30 Euronext N.V., 33 European commodities exchanges, modernization of, 29 event trading, 161 exchange-traded funds (ETFs), 185 in Flash Crash, 76-77 mutual funds versus, 232 exchanges collocation, origins of, 165-169 commodities exchanges, history in United States, 27-30 equities exchanges, Regulation NMS changes to, 21, 31-37 Flash Crash, details of, 61-79 individual stock circuit breakers, 89 integration, lack of, 128 intraday moves after Great Recession, 2-3 unification of commodities and equities exchanges, 36, 70 executing brokers, 32 exhaust, 33 F Facciponte, Joseph, 40 failed trades in capital crisis of 1969-70, 106-108 Federal Reserve, regulation of markets through, 129 FINRA (Financial Industry Regulatory Authority), 19, 41 Mary Schapiro’s leadership of, 97 Trillium Brokerage Services LLC, case against, 210-212 INDEX fixed commissions, 118-120 Flash Crash Accenture, affect on, 85-87, 90 details of, 6-8, 61-79 immediate Congressional reaction to, 81-84 investigation of, 91-95, 183-185, 189-191 consolidated tape delays, 199-205 SEC ethics issues, 193-198 precursors to, 1, 4-6 SEC and CFTC report on, 213-227 trades busted afterwards, 88 flash orders, 36, 42-43 banning, 47-59 FOIA (Freedom of Information Act), 113-114 Ford, Gerald, 120 Fox, Kevin N., 40 Frank, Barney, 55, 186 Fraud Enforcement and Recovery Act of 2009, 49 Freedom of Information Act (FOIA), 113-114 Freeman, John P., 197 front-running by hedge funds, 140 Futures Industry Association of America, 101 G Galbraith, John Kenneth, 58 Gastineau, Gary, 232 Geithner, Timothy, 81 Gensler, Gary, 86, 97-101, 216 Getco, 157, 196 241 Gillespie, Ed, 53 Giuliani, Rudolph, 126 Glassman, Cynthia, 146 Goldman Sachs, 39-41, 92, 99 Goldstein, Michael, 68, 186 Gorelick, Richard, 151-152, 155 Graham, Benjamin, 177 Grassley, Charles, 197 Great Britain, elections prior to Flash Crash, 66 Great Depression, volatility after, 179 Great Recession details of, recovery from, 1, 4-6 Greece, debt of, 65-66 Greenspan, Alan, 98 Gulf of Mexico, BP oil spill (Deepwater Horizon), 67 H Hartzell, David, 230-231 Hathaway, Frank, 178 Hawaiian Holdings, Inc., 41 hedge funds, 159-160 front-running by, 140 Hensarling, Jeb, 187 high-frequency trading (HFT) accusation of market manipulation, 39-45 blamed by Congress for Flash Crash, 83-84 collocation, origins of, 165-169 Congressional pressure on SEC to reform, 54-59 eroded market confidence from, 207-210 explanation of, 149-164 242 INDEX Flash Crash consolidated tape delays, 199-205 details of, 61-79 investigation of, 91-92, 183-185, 189-191 in report, 221-227 role in, 7-8 SEC ethics issues, 193-198 origins of, 135-147 public relations efforts of, 150 Quants versus, 157-160 retail trades and, 32 statistics on, 156 strategies employed by, 11-25, 34-37, 161-162 Trillium Brokerage Services LLC, case against, 210-212 volatility reasons for, 175-182 rhythm of, 176-177 history of commodities exchanges in United States, 27-30 Hoffman, Stuart, 234 hot-potato trading, 22 Houtkin, Harvey Ira, 133-139, 161 Hu, Henry, 44, 58, 98 Hunsader, Eric Scott, 199-205, 225-226 Hunt, Ben, 163 hybrid market, 78 individual stock circuit breakers, 89 initial public offerings (IPOs), 142-144 integration of exchanges, lack of, 128 Intercontinental Exchange (ICE), 30 internal trades, 31-32 internalization during Flash Crash, 73 in Flash Crash report, 222-225 intraday moves after Great Recession, 2-3 investigation of Flash Crash, 91-95, 183-185, 189-191 consolidated tape delays, 199-205 SEC ethics issues, 193-198 investor behavior, overcorrelation of, 177 investor confidence after Flash Crash, 62 erosion of, 207-210 investor recommendations, 229-234 IPOs (initial public offerings), 142-144 Ira Haupt & Co., 108 Island (ECN), 144-145 Ivandjiiski, Krassimir, 42 Ivandjiiski, Dan, 41-42 I J–K ICE (Intercontinental Exchange), 30 Ichan, Carl, 136 Johnson, Lyndon, 114 Johnson, Simon, 186 Junger, Sebastian, 67 justifiable trades, 88 INDEX Kanjilal, Debases, 189 Kanjorski, Paul, 81-83 Kaufman, Ted, 37, 47-61, 103, 183-187, 193-198, 208-210 Kay, Bradley, 231-232 Kim, Edward, 142 King, Elizabeth, 196 Kirilenko, Andrei, 171, 201 Kotok, David, 234 Kotz, David, 197 L latency, 167 layering, 210-212 Leibowitz, Larry, 42 Lemov, Michael, 114 Levitt, Arthur, 14, 35, 50, 110, 118, 140-144 Lewis, Michael, 191 life-cycle funds, 230 LIFFE (London International Financial Futures and Options Exchange), 30 limit orders, market orders versus, 224 Lincoln, Abraham, 48 liquidity during Flash Crash, 72-73 Liquidity Replenishment Point (LPR), 78 Liquidnet, 173-174 Lo, Andrew W., 160 London International Financial Futures and Options Exchange (LIFFE), 30 Long Term Capital Management, 98, 159 Loomis, Philip A., 121 243 LPR (Liquidity Replenishment Point), 78 Luddites, 150 Lukken, Walt, 28 M Madoff, Bernie, 56 Malyshev, Misha, 39 market manipulation, HFT (highfrequency traders) accused of, 39-45 market orders, limit orders versus, 224 market volatility See volatility Markman, Jon, Massey, Raymond, 49 Mathisson, Dan, 36, 141 Maulden, John, 234 Mayer, Martin, 127 McCaughan, Jim, 178, 229-230 McGinty, Tom, 197 Mecane, Joseph M., 159 Melton, Mark, 151 Merrill Lynch, 99, 189-190 Merrin, Seth, 173-174 Merton, Robert C., 159 Mikva, Ab, 53 Minner, Ruth Ann, 48 momentum ignition, 18, 23 Moss, John E., 113-122 Murphy, Eddie, 29 mutual funds, ETFs (exchangetraded funds) versus, 232 N Nagy, Chris, 8, 225 naked puts, 127-128 244 naked short selling, banning, 47-59 naked sponsored access, 226 Nanex, 200 Narang, Manoj, 152-156 NASD (National Assocation of Securities Dealers), 102 regulation after Black Monday (October 19, 1987), 136-137 NASDAQ on Black Monday (October 19, 1987), 133 initial public offerings (IPOs), 142-144 investigation of price fixing, 139 modernization of, 33 Regulation NMS changes to, 21 regulation of ATSs (Automatic Trading Systems), 139-144 SOES (Small Order Execution System), 136-138 National Association of Securities Dealers See NASD National Market System, 116, 145 New York Board of Trade, 28-30 New York Mercantile Exchange, 28-30 New York Stock Exchange See NYSE Niederauer, Duncan, 172 Nixon, Richard, 101 Nordson Corp., 185 NYSE (New York Stock Exchange) Black Monday (October 19, 1987), 131-132 capital crisis of 1969-70, 105-111 INDEX curbs on trading, 22 flash orders, avoiding, 42-43 modernization of, 33-34 reaction to Flash Crash, 78 Regulation NMS changes to, 21 regulation of ATSs (Automatic Trading Systems), 139-144 volume declines in, 146-147 NYSE Euronext, 168 NYSE Market Regulation, merger with NASD, 102 O O’Brien, William, 42, 84 O’Malia, Scott, 63, 83, 202 Obama, Barack, 50, 53, 81, 100, 209 OCT (Order Confirmation Transaction), 138 Oesterle, Dale, 146 oil spill in Gulf of Mexico (Deepwater Horizon), 67 OMX exchange, 33 Order Confirmation Transaction (OCT), 138 “Outside the Box” blog (Maulden), 234 overclocking, 158 overcorrelation of investor behavior, 177 Overdahl, James, 197 P Pacific Stock Exchange, 33 A Perfect Storm (Junger), 67 Peterson, Kristina, 176 Phelan, John, 126 Philadelphia Stock Exchange, 33 INDEX Phillips, Susan, 101 pinging, 20-21 Pipeline Trading LLC, 173 portfolio insurance, 130-131 Prechter, Robert, 125, 130 predatory trading, strategies for avoiding, 12-13 price fixing, NASDAQ investigation of, 139 pricing structures, decimal pricing, 144 principles-based systems, 28 public relations efforts of highfrequency traders, 150 puts, naked puts, 127-128 Q–R Quants, high-frequency trading versus, 157-160 Quinn, Jack, 53 quote stuffing, 200, 203 Rakoff, Jed, 103 Reagan, Ronald, 83, 102, 128-129 recession See Great Recession, 1, 4-6 recommendations for investors, 229-234 recovery from Great Recession, 1, 4-6 regulation of ATSs (Automatic Trading Systems), 139-144 Congressional pressure on SEC, 50-59 Securities Act Amendments of 1975, 113-122 self-regulation, 120 through Federal Reserve, 129 245 Regulation ATS, 141 Regulation FD, 34 Regulation NMS, 13, 145-146, 168 market changes resulting from, 16-17, 21, 31-37 regulators See CFTC; SEC researching stocks, recommendations for, 233-234 retail market, wholesale market versus, 171-174 retail trades, monopoly by brokerage houses, 31-32 retirement savings, recommendations for, 230 Reuters, 195 revenue generated from volume, 165-166 RGM (HFT company), 151 “Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market” (Vega), 98 Ritholtz, Barry, 234 Robinette, Robbie, 151 Rowen, Harvey A., 106, 116 Rubin, Robert, 98-100 Rueckert, Cleveland, 180 Rumsfeld, Donald, 114 S S&P 500, volatility, S&P 500 E-Mini futures contracts in Flash Crash, 68-69 Safian, Ken, 158 Salmon, Felix, 211-212 Saluzzi, Joseph, 11-25, 44-45, 61 Sanders, Bernie, 100-101 Sarbanes, Paul, 100 246 Sarbanes-Oxley Act, 100 Schapiro, Mary, 43, 52-61, 86, 97-103, 183, 188, 198, 209-210, 214, 226 Scholes, Myron, 159 Schultz, Paul, 139 Schumer, Chuck, 43-44, 56, 172, 187 Schwab, Charles, 120 Schwed, Fred, 105 Schwert, G William, 179-180 SEC (Securities and Exchange Commission) Arnuk and Saluzzi’s finding discussed with, 44-45 Congressional pressure on, 47-59 Division of Risk, Strategy and Financial Innovation, formation of, 97 on erosion of investor confidence, 208-210 Flash Crash report, 213-227 immediate reaction to Flash Crash, 82 investigation of Flash Crash, 183-185, 189-191 consolidated tape delays, 199-205 ethics issues, 193-198 quick fix rules after Flash Crash, 85-87, 90 tracking mechanism, need for, 64 Securities Act Amendments of 1975, 113-122 Securities Investor Protection Corporation (SIPC), 62, 109, 115 INDEX self-regulation, 120 Senate See Congress servers, collocating, 17, 22, 34 Shell, Adam, 214 short selling, banning naked short selling, 47-59 Silver, Jeff, 163 SIPC (Securities Investor Protection Corporation), 62, 109, 115 Sloan, Alfred P., 14 small investors in capital crisis of 1969-70, 105-111 sniping, 161 SOES (Small Order Execution System), 136-138 Sorathia, Mohammed, 231 Special Trust Fund, origins of, 108-109 speed, role in high-frequency trading, 166 Spiders, 76 Spielberg, Steven, 49 Spitzer, Eliot Laurence, 189-191 spoofing, 18 Steel, Bob, 100 stock exchanges, creating competition, 116-118 See also equities exchanges stock-picking, volatility and, 177 stop loss orders, 75-76 stub quotes, 75-76 Summers, Larry, 81 T target date funds, 230 Thain, John, 99 ticker See consolidated tape INDEX time delay of consolidated tape, 72, 199-205, 225-226 “Toxic Equity Trading Order Flow on Wall Street: The Real Force Behind the Explosion in Volume and Volatility” (Arnuk and Saluzzi), 19 Toyota, approval ratings, 92 trade-through rule, 144-146 Tradeworx, 153-155 Trading Places (film), 29 Trillium Brokerage Services LLC, 210, 212 U–V uncertainty, volatility and, 177 unification of commodities and equities exchanges, 36, 70 “upstairs” market, 119-121 Uptick Rule, 50-51, 54 Vanguard Funds, 185 Vega, Clara, 98 volatility during Flash Crash, 72-73 after Great Recession, 2-3 in high-frequency trading (HFT), 8-9 reasons for, 175-182 rhythm of, 176-177 volume of trading declines in NYSE, 146-147 due to automated trading, 64 on equities exchanges, 31 during Flash Crash, 81 inflating, 22 revenue generated from, 165-166 247 W–Z Wachovia National Bank, 100 Waddell & Reed Financial, Inc., 69, 213-219 Warner, Mark, 187 Washington Post, 196 Weild, David, 142-143 Weisberg, Theodore, 222 Wells Fargo, 100 Whalen, Christopher, 40 Where Are the Customer’s Yachts? (Schwed), 105 White House, immediate reaction to Flash Crash, 81-84 wholesale market, retail market versus, 171-174 Williams, Harrison “Pete,” 119 Wunch, Steve, 143 Yardeni, Ed, 8, 234 Yaroshevsky, Yan, 180-181 laij Press ^^^H FINANCIAL TIMES In an increasingly competitive world, it is quality of thinking that gives an edge—an idea that opens new doors, a technique that solves a problem, or an insight that simply helps make sense of it all We work with leading authors in the various arenas of business and finance to bring cutting-edge thinking and best-learning practices to a global market It is our goal to create world-class print publications and electronic products that give readers knowledge and understanding that can then be applied, whether studying or at work To find out more about our business products, you can visit us at www.ftpress.com ... Education—Japan Pearson Education Malaysia, Pte Ltd Library of Congress Cataloging-in-Publication Data: McTague, Jim, 194 9Crapshoot investing : how tech- savvy traders and clueless regulators turned. .. principles—ranging from maintaining adequate financial safeguards to conducting market surveillance—in order to uphold their good standing as a regulated contract market Such an approach has the advantage... major markets within the United States and other places Because of the way this software interfaces with various markets and exchanges, the bank has raised the possibility that there is a danger