That is it. Twenty-nine chapters, seven parts, and around forty posts later, we are done with “Trading and Exchanges: Market Microstructure for Practitioners” by Larry Harris (ISBN: 0-19-514470-8, Oxford University Press, 2003).
This is the last chapter of the book, and Harris saved a spicy one for the end. Chapter 29 is about insider trading. You might think it is simple: insiders trade on secret info, SEC catches them, they go to jail. But Harris shows that the whole topic is way more complicated than that. There are actually serious economists who argue insider trading should be legal. Let me explain.
In Part 1 we looked at how bubbles form and crashes happen. Now the obvious follow-up: can we actually prevent this stuff? Or at least make it less painful? Harris walks through the tools markets use to deal with extreme volatility, and the picture is more complicated than you would expect.
This is the most dramatic chapter in the entire book. Bubbles inflate, crashes wipe out fortunes, and panic replaces logic. If you ever watched a stock chart go vertical and wondered “how does this end?”, Harris answers that question here. Spoiler: badly for whoever is holding the bag last.
Chapter 27 is a fascinating time capsule. Harris wrote this around 2003, when the debate between floor trading and electronic trading was still alive. The NYSE was building a new trading floor. The Chicago exchanges were still mostly pit-based. Reading it now, knowing how completely electronic trading won, is like reading someone in 1995 carefully weighing the pros and cons of email versus fax machines.
Should all trading in a stock happen in one place, or is it okay to have dozens of venues competing for your order? Chapter 26 is about exactly this tension, and honestly, it is one of the most relevant chapters in the whole book if you want to understand why modern markets look the way they do.
If you use Robinhood or any zero-commission broker, this chapter explains how the sausage is made. You pay zero commission, sure. But someone is paying your broker for the privilege of filling your order. That someone is a wholesale dealer, and the payment is called “payment for order flow.” Chapter 25 breaks down how this works and whether it hurts you.
The New York Stock Exchange used to have these people called specialists. Each one was assigned a handful of stocks and was basically the boss of all trading in those stocks. They stood at a physical post on the floor, saw every order coming in, ran the opening auction, and traded with their own money when nobody else would. One of the most privileged positions in finance. And one of the most controversial.
If you have money in a Vanguard or Fidelity index fund, or you buy SPY or VOO through your brokerage app, Chapter 23 is basically about you. Harris wrote this in 2003, but it reads like a prediction of what actually happened. Index investing went from a niche idea to the default way normal people invest. This chapter explains why.
This is the part of the book where Harris basically tells you that almost everything you think you know about picking winning traders is wrong. If Part 1 was about how hard it is to evaluate past performance, Part 2 is about why predicting future performance is nearly hopeless. And honestly, it is one of the most important chapters in the entire book.