Review Essay

The Virtue of Monopoly

Why the Stock Market Stopped Working

In This Review

Darkness by Design: The Hidden Power in Global Capital Markets
Darkness by Design: The Hidden Power in Global Capital Markets
By Walter Mattli
Princeton University Press, 2019, 264 pp. Purchase

You’ve heard the story many times. The stock market is rigged. A highly secretive group of opaque financial institutions is making billions of dollars from socially useless high-frequency trading—placing and withdrawing stock orders hundreds of thousands of times per second—with all those profits coming, in one way or another, from the rest of us. The biggest losers of all? Small, mom-and-pop, or retail, investors, who cannot hope to compete.

Perhaps the best-known proponent of this narrative is the author and financial journalist Michael Lewis. In his 2014 book, Flash Boys, Lewis painted the stock market as a battle in which the good guys were losing to the bad guys. The book sold well and even instigated a handful of criminal investigations into high-frequency traders (HFTs), none of which bore any visible fruit. For the truth is that even with the rise of high-frequency trading since the early years of this century, actual mom-and-pop investors have never had it so good. Armed with online accounts offering trades for minuscule fees, they see their transactions go through instantaneously, without the sorts of delays that can allow the market to move against them before their order is filled. If the stock market is broken, it’s not broken in a way that is obvious to retail investors.

Yet Lewis was right to worry about HFTs; he just misidentified their main victims. This is the revelation at the heart of Walter Mattli’s masterful Darkness by Design. Great books make you reexamine your assumptions, and this one delivers in spades. It not only offers a compelling critique of how the stock market has evolved over the past 15 years; it also forces readers to reconsider the idea that competition is good and monopolies are bad. What has truly tilted the playing field in favor of a handful of financial behemoths and HFTs, Mattli argues, is the growing fragmentation of stock markets, a process actively encouraged by misguided government regulators. The biggest losers of that development are not retail investors, who tend to be fairly well-off, but pension funds, insurance companies, and other major institutional investors.

Those financial behemoths are, in fact, the proverbial little guy. One of the paradoxes of financial terminology is that terms such as “retail investor” and “small business owner” connote the relatively impecunious, whereas in fact those investors and owners are disproportionately likely to be in the top one percent of the

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