Joseph Saluzzi ( and Sal L. Arnuk ( are co-heads of the equity trading desk at Themis Trading LLC (, an independent, no conflict agency brokerage firm specializing in trading listed and OTC equities for institutions. Prior to founding Themis, Sal and Joe worked for more than 10 years at Instinet Corporation, pioneers in the field of electronic trading, and at Morgan Stanley.





This Sunday will mark the 2nd anniversary of the May 6th Flash Crash of 2010. As we all trade in this extremely low-volume environment, it is fitting that we recap where we stand today.

Listening to NYSE Euronext’s 1st quarter conference call yesterday, we shook our heads in dismay as management described a trading environment where volumes fell to a four and one half year low – the lowest levels since Reg NMS was implemented in late 2007, in fact.

NYSE’s Duncan Niederauer explained his 44% profit decline was due largely to a 25% decline in revenues from transactions from a year earlier. The culprit: An unfriendly environment for high frequency trading firms. From his point of view, regulators and folks in the media hyped the HFT bogey man too much, creating uncertainty, causing an HFT migration into other asset classes and geographies.

Niederauer doesn’t get it. He is mistaking the symptoms for the underlying problem. HFT volumes are down because investor volumes are down. Investor volumes are down because traditional retail and institutional buyers and sellers of stock have been steadily waking up to the dangers of drinking at the increasingly dangerous ”stock market watering hole.”

Like the animals on the Serengeti, who for years were accustomed to sipping long and heartily at their favorite spot, retail and institutional investors now see what’s beneath the surface. And they are deciding that the drink they crave is just not worth the risk.

More than $250 billion in long term equity funds has retreated from the markets since May 6th, 2010 – despite a slow but steady improvement in the economy and a stock market that has nearly doubled since the 2009 lows. It isn’t that these investors don’t have confidence in the economy. They don’t have confidence in our markets.

It isn’t hard to blame them. They have witnessed a radical transformation of the best capital allocation market system in the world, into one where:

- 13 stock exchanges cater to hyper traders who game the system, chasing exchange rebates, and leveraging speed for the purpose of a nanosecond scalping dance.
- More than 40 dark pools together trade more than 1/3rd of all shares.
- Conflicts of interest abound as exchanges own stakes in dark pools, and HFT firms own stakes in exchanges.
- Brokerage firm internalization of trades feeds the HFT financial modeling of investor orders.
- Exchange data feeds act as a veritable DVR of investor orders and behavior, the recording of which is then sold to HFTs.
- Rogue exchange traded products break down, trap unsophisticated investors, and only enrich the issuers, exchanges, and HFT firms that make markets in them.
- HFT firms in the last decade have achieved wondrous profitability (double-digit Sharpe ratios) while investors at best have clawed back to even.
- More than $1 billion in customer-segregated monies goes missing from MF Global, with not a single prosecution, nor a hope of redress.

As they witness all of the above, traditional retail and institutional investors see that our regulators must be having a challenging time acting as effective policemen in the marketplace:

- Flash orders, which give HFTs a quick peak at retail and institutional orders, are still alive and well, under many different names, despite a proposed banning of them in 2009.
- Dark pool regulation, also proposed years back, has not materialized.
- Internalizing brokerage/HFT firms, which clearly played a huge role in the market melt-down on May 6th (perhaps as well in the financial crisis in late 2008 and 2009) still practice the same way, with additional help from dark pools and exchanges who have all embraced “liquidity provider” programs.
- And finally, payment for order flow (PFOF) is alive and well on numerous levels throughout the system – from retail, to maker/taker exchange pricing, to free dark pool executions.

Investors know that the markets are broken. And they desperately want it fixed.

Our outrage over the transformation of the best capital markets in the world to this conflicted and fragmented web of chaos led us to write our book, Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence and Your Portfolio, which is being published by Financial Times Press.

When the book comes out June 3rd, it will find no shortage of critics from within our industry. However, we needed to write it. For years we have spoken about all of these issues in trade magazines and the financial media, and at industry conferences and panels, as well as with our regulators.

We wrote Broken Markets so that Main Street could understand what happened to our markets, to inspire change, so we can once again have the best capital markets in the world.

So, Happy Anniversary to everybody who made the Flash Crash happen. We hope you are enjoying yourself.

Because we, and millions and millions of other retail and institutional investors around the world, are not.

Category: Regulation, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “Happy 2nd Anniversary, Flash Crash of 2010 !”

  1. bobnoxy says:

    Oh, Honey! Nice to know it’s not just me that thinks the stock market is broken, and rigged against the rest of us. Pretty soon it’ll be the computers fighting amongst themselves with everyone else out, looking to buy bargain priced real estate to rent out.

  2. Paddy Megroyn says:

    Unfortunately, we haven’t been as effective in dealing with this situation like the elephant was in stamping on the gator.

  3. techy says:

    There are trillion of dollars involved worldwide. They have enough profits that they can buy all the politicians and their henchman. Over here in USA we are too busy fighting for
    1. Black is not good enough not be the President
    2. Religious theocracy is most important

    we do not care about the overlords who skim all the cream from the current systems. Hey we need their money to support our above said cause even if it means we end up slaving all our lives just to pay our bills.

    I think we deserve this.

  4. Sunny129 says:

    Corporatocracy has taken over Democracy in America.

    Blaming left vs right is an old and irrelevant game, reflects the stark ignorance I see on many chats/message boards. MSM (90% controlled by 6 mega Corps) has succeeded in brain washing. Seeking truth is hard work and definitely NOT delivered on evening news!

    Regulation and regulators are joke. Mary Shapiro of SEC is a career bureaucrat with NO spine. Gensler of CFTC gets the order from Vampire squid.

  5. tnoll says:

    What a horrible picture. Even if she gets away, she starves with no trunk.

  6. RW says:

    When the extraction of rents is allowed to proceed unimpeded then market failures and misallocation of capital become inevitable — the market does not serve the many it serves the few — so Duncan Niederauer has it exactly backward: The problem is not uncertainty, it is certainty.

    @tnoll, the croc never had a chance and the elephant was seen later with her baby, both apparently unharmed; here is a slideshow that shows the whole sequence.

  7. MidlifeNocrisis says:


    Go to YouTube and watch the video. She gets away (eventually) with trunk intact. Not to be confused with the civilized world where our retirement accounts do not remain fully intact and large chunks removed each year.

  8. Neildsmith says:

    OK – I accept the fact that the markets are broken and will happily buy the book, but what, exactly, is the effect of this. Are companies starved for capital? Are they unable to exploit opportunities to make money because the stock markets don’t provide a rational measure of ROI?

    I understand why traders might hate this market. I understand why individual investors are shying away from it and sitting on their hands. But… so what? Is it really bad for individuals to walk away from what has always been a pretty rigged game?

  9. 873450 says:

    Prior to hooking up with their muppets and wage monkeys at the Stock Market Watering Hole, the predators injected themselves with massive doses of steroids and, mixing together algorithms they found posted on the Internet and thought made sense but didn’t understand, conjured and levered up highly complex, highly explosive, highly profitable time bombs disguised to look like high protein, non-alcoholic health food beverages.

    At the Watering Hole the predators sold time bombs to their muppets and wage monkeys saying, “We just made this stuff up from nothing. Drink it. It’s good for you. You’ll like it. You, too, can be a predator. Let’s get rich together really, really fast.” When the muppets got sick and had no money left to take, the predators climbed into their Ferraris and went drunk driving all around the world convincing everyone they needed to buy time bombs if they ever want to drunk drive a Ferrari.

    The biggest tragedy is Obama trying to make nice with drunken predators overdosed on steroids planting time bombs everywhere. Instead of stomping out the most rabid, out of control predators and safely corralling the rest, it seems the matriarch tried to cut a deal, agreeing to throw her baby into the water in exchange for the predator releasing her from its jaws. Immediately after killing and eating her baby, the predator clamped its jaws back onto the matriarch’s trunk saying, “You really don’t understand the predatory instinct. You can’t stop us. We can’t stop ourselves. We own everything, including you.”

  10. How many macroeconomic theories specifically encompass the 6 May 2010 flash clash as exactly – precisely-consistent with theory?

    The debt-money-asset global macroeconomy is an ideal quantum self assembly nonlinear system with simple self organizing proportionalities exactly equivalent to physics and chemistry.

    Friday 4 May’s 2012 Wilshire nonlinear gap lower was predicted.

    And the 11 October 2007 Wilishire nominal high was prospectively predicted……

  11. mathsview says:

    HFTS Machines Time Now joins the lowest volume in multiple recent years at Nasdaq and NYSE stocks exchanges

    From a mathematical -physics point of view diagnostic should be a little southern for the time coming for the S.E

    Its not only Sell in May and Go Away Time .Its physic and mathematics indicating the path.

    Super Helicopter is beggining to be called from all places to print and throw more ”green notes”

    Spain is on the edge of the knife…..(of an intervention by IMF, WB,ECB,EU)

    Greece at polls is Pandoras Box,France is hesitating the way forward,and Germny observes all as cool as possible
    Netherland trembles and Italy seems doesnt count.
    Argentina and Bolivia nationalizates Spanishs strategic investments in South America(oil,electricity)
    Nice May I wouldnt Say this year 2012 !! Perhaps June – July shall be better.Hope so .Sometimes things need to
    deepen to jump up after ,,,