The Adaptive Genius of Rigged Markets

Market infrastructure isn't neutral. It never has been. Someone always extracts rents from the flow of information, and modern institutional investors are caught in a system where they get exactly the price they said they'd pay, nothing better, no matter what algorithms or tactics they deploy. The question isn't whether markets are rigged. It's who gets to rig them.

• Institutional investors experience something uncanny when they trade. They place a limit order to buy at $50.50, and within minutes the stock price drifts up to exactly that level, as if someone knows their private information. Volume appears and disappears at precisely the moments that matter.
• This isn't incompetence or bad luck. HFT firms have built systems that recognize the patterns of large orders, no matter how they're chopped up and hidden. They've embedded themselves in the information flow of the market itself.
• The real problem is structural, not technological. Markets have always been controlled by whoever masters the machinery of information. In the 1870s it was Vanderbilt and Gould. Today it's algorithms. The mechanism changes but the extraction doesn't.
• HFT firms provide liquidity and narrow spreads, which sounds good until you realize the trade-off. Investors accept razor-thin improvements in execution costs while losing the ability to ever beat the market through superior trading skill. The game has been fundamentally changed.
• What happens when the firms that built this system lose control of it? The big financial institutions want their market infrastructure back. They'll adopt the same Big Data techniques. The parasite changes, but the structure of being skinned remains.