In Darkness by Design, the author takes a dim view of the transformation of stock trading in recent decades. The hard-won fairness, liquidity, and transparency of organized exchanges and SEC regulation have given way to dark pools, fragmentation, and trading advantages for the rich and powerful. Accelerated trading aids privileged insiders, not investors. The post-2006 profit-making New York Stock Exchange (NYSE) soft-pedals earlier protections. Wealthy broker-dealers buy political influence, enabling them to evade scrutiny and regulation. Such pessimism is general since the global financial crisis undermined faith in financial institutions and a political culture that protected wealth accumulated by malefactors, while taxpayers shouldered the losses. Walter Mattli brings the distinctive skills of the political economist to bear in a well-written and disturbing narrative of the inherent difficulties of governing competitive markets, when manipulation becomes a feature and not a pathology.
I was not invariably convinced. Mattli is impressed that one Chicago market operator can afford “the rough equivalent of approximately one hundred times the amount of data contained in the Library of Congress,” putting smaller operators at a disadvantage (p. 2). Given the errors that algorithmic misuse of such data sets generated in 2007–08, one might suggest that a small operator constrained to one business history from that library—perhaps Charles Kindleberger's Manias, Panics, and Crashes (1978)—could easily perform better; though admittedly such a paragon might not be hired by the jargon-loving chief financial officer of Goldman Sachs, David Viniar, who absurdly excused his failings in 2007 by “25 standard deviation events, several days in a row” (not a “Black Swan” but simply an impossibility).
Business historians will especially value Mattli's longer-term perspective—from the early NYSE under the buttonwood tree to exploiting some recent data from the NYSE's Mahwah, New Jersey, archive—as he seeks to explain the drivers of changes in market structure. He vigorously contests the view that the old NYSE was a technologically backward overpriced monopolist, but the past is sometimes viewed through rose-tinted spectacles. He is silent on Citibank directors cheating their stockholders by concealed asset transfers in the 1920s or the age it took to put the fraudulent, Morgan-protected, NYSE president Richard Whitney behind bars in 1938. Some may incline to the view that financial markets, then as now, attracted criminals because of their inherent spectacular ability to leverage returns and reputations without delivering value. Yet the wider spread and favorable returns of representative stock exchange portfolios, recently as in the past, suggest that one needs to put these egregious blemishes in perspective. Such indulgence is understandably wearing thin, but if there is a lesson of history it is perhaps that remedial disinfection requires a market crash as much as the generally damning prosecution evidence provided here.
