CHAPTER 3Dark Pools, Exchanges, and Market Structure

  • —Who is the compliance manager chasing on the trading floor?
  • —A runaway algo.

In addition to enabling record‐breaking data processing and storage capacity, technology is also responsible for a fair share of previously unthinkable risks. When billions of dollars are moved around the globe at breathtaking speed, the dynamics can be outright dangerous. Ensuring the legitimacy of accounts and identifying and blocking malicious behavior are very difficult tasks to execute in real time.

The financial markets used to comprise just one exchange for each class of financial instrument. If you traded equities, you did so at the New York Stock Exchange (later, NASDAQ was created with the explicit purpose of trading new technology stocks). If you traded commodities or futures, you would do so at the Chicago Mercantile Exchange. Another exchange existed solely for options. Foreign currency pairs and most of bonds never formally traded on an exchange, having been intermediated privately by banks and specialized dealers. The bottom line is that you had clarity and consistency in where you would go to trade a specific financial instrument.

This is no longer the case. Today, there are 21 “national securities exchanges” registered with the US Securities and Exchange Commission, the top regulatory body for just equities, ETFs, and equity options. The names of exchanges registered to trade equities at the time this book was written are shown ...

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