TICKER tape: it’s an enduring image of Wall Street. The paper is gone but the digital tape runs on, across computer and television screens. Those stock quotations scurrying by on CNBC are, for many, the pulse of American capitalism.
But Sal L. Arnuk doesn’t really believe in the tape anymore — at least not in the one most of us see. That tape, he says, doesn’t tell the whole truth.
That might come as a surprise, given that Mr. Arnuk is a professional stockbroker. But suddenly, and improbably, he has emerged as a leading critic of the very market in which he works. He and his business partner, Joseph C. Saluzzi, have become the voice of those plucky souls who try to swim with Wall Street’s sharks without getting devoured.
From workaday suburban offices here, across from a Gymboree, these two men are taking on one of the most powerful forces in finance today: high-frequency trading. H.F.T., as it’s known, is the biggest thing to hit Wall Street in years. On any given day, this lightning-quick, computer-driven form of trading accounts for upward of half of all of the business transacted on the nation’s stock markets.
It’s a staggering development — and one that Mr. Arnuk, 46, and Mr. Saluzzi, 45, say has contributed to the hair-raising flash crashes and computer hiccups that seem to roil the markets with alarming frequency. Many ordinary Americans have grown wary of the stock market, which they see as the playground of Google-esque algorithms, powerful banks and secretive, fast-money trading firms.
To which Mr. Arnuk and Mr. Saluzzi say: enough. At their Lilliputian brokerage firm, they are tilting at the giants of high-frequency trading and warning — loudly — of the dangers they pose. Mr. Saluzzi was the only vocal critic of H.F.T. appointed to a 24-member federal panel that is studying the topic. Posts from the blog that the two men write have been packaged into a book, “Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence and Your Portfolio,” (FT Press, 2012) which was published in June. They are even getting fan mail.
But they are also making enemies.
Proponents of high-frequency trading call them embittered relics — quixotic, old-school stockbrokers without the skills to compete in sophisticated, modern markets. And, in a sense, those critics are right: they are throwbacks. Both men say they wish Wall Street could go back to a calmer, simpler time, all the way back to, say, 2004 — before the old exchange system splintered and murky private markets sprang up and computers could send the Dow into 1,000-point spasms. (The bottle of Tums Ultra 1000 and the back-pain medication on Mr. Arnuk’s desk here are a testament to their frustrations.)
They have proposed solutions that might seem simple to the uninitiated but look radical to H.F.T. insiders. For instance, the two want to require H.F.T. firms to honor the prices they offer for a stock for at least 50 milliseconds — less than a wink of an eye, but eons in high-frequency time.
On the Friday before Labor Day weekend, Mr. Arnuk was sitting in the office of Themis Trading, the brokerage firm he founded with Mr. Saluzzi a decade ago. It is little more than a fluorescent-lit single room; the most notable decoration is a poster signed in gold ink by the cast of “The Sopranos.” Above Mr. Arnuk, the tape scrolled by on the Bloomberg Television channel. But other numbers danced on four computer screens on his desk. Mr. Arnuk kept moving his cursor across those screens, punching in figures, trying to find the best price for a customer who wanted to buy a particular stock.
His eyes scanned the stock’s going price on 13 stock exchanges across the nation. The investing public is now using so many exchanges because new regulation and technology have rewritten the old rules and let in new players. It’s not just the Big Board or the Nasdaq anymore. It’s also the likes of BATS and Direct Edge.
Mr. Arnuk then eyed the stock’s price on dozens of other trading platforms — private ones most people can’t see. Known as the dark pools, they help hedge funds and other big-money players trade in relative secrecy.
Everywhere, different prices kept flickering on the screens. Computers at high-speed trading firms, Mr. Arnuk said, were issuing buy and sell orders and then canceling them almost as fast, testing the market. It can be hell on human brokers. On the tape, the stock’s price was unchanged, but beneath the tape, things were changing all the time.
“They will flicker to see who is not flickering,” Mr. Arnuk said of H.F.T. computers. “The guy who is not flickering is the idiot — the real investor.”
From his desk a few feet away, Mr. Saluzzi chimed in: “That’s how the game is played now.”
ON the afternoon of May 6, 2010, shortly before 3 o’clock, the stock market plummeted. In just 15 minutes, the Dow tumbled 600 points — bringing its loss for the day to nearly 1,000. Then, just as fast, and just as inexplicably, it sprang back nearly 600 points, like a bungee jumper.
It was one of the most harrowing moments in Wall Street history. And for many people outside financial circles, it was the first clue as to just how much new technology was changing the nation’s financial markets. The flash crash, a federal report later concluded, “portrayed a market so fragmented and fragile that a single large trade could send stocks into a sudden spiral.” It turned out that a big mutual fund firm had sold an unusually large number of futures contracts, setting off a feedback loop among computers at H.F.T. firms that sent the market into a free fall.
