IF you wanted to get a deeper understanding of why we are in the mess that we are in and why we are unlikely to come out of it (since we are solving the problems with the same mindset that created them), you need not read tomes. You just need to read four pages of the Federal Reserve Bank of Chicago Fed letter for October 2012 blandly titled, ‘How to keep markets safe in the era of high-speed trading’.
‘Speed’, ‘Instantaneous’ – the great instant gratification trip of the human race in the last three decades (esp.) is going to be its ultimate destruction weapon.
It is a very profound piece of research on not just high-speed/algorithmic trading but on every aspect of how we conduct our lives and businesses and how society/economies have come to organise themselves.
Each sentence (or, sentences) is pregnant with meaning and possibilities.
High-frequency trading is a made-to-order systemic disaster, all for few extra bucks. The reason why risk controls are overlooked is that the greater the volume of orders, the greater the gains since the per share gain is miniscule.
Amazing chutzpah on the part of market participants to suggest that regulators are responsible for setting risk control parameters and to ensure compliance with those parameters! Then, they will call for free-market, self-regulation and engage in regulatory capture.
Some of the Broker-dealers and Futures traders have equity stake in the Exchanges. How will exchanges impose risk controls on its members? So much for arms-length and Chinese walls.
This is the best piece of research you can read in 2012.
It documents why we have become our own Frankenstein monsters.