The book describes how following the privatization of the exchanges in the past decade, they embraced a model called "colocation". Colocation is an IT term meaning to rent data center space (ping, power and pipe) for a service fee. The key difference is that in this instance colocation means colocating a trader's servers in the same data center where the Exchange has its servers. The key reason being 'latency' i.e. the amount of time it takes to propagate data over a network. As an IT guy myself, I can tell you that the latency AND bandwidth you get via physical colocation v.s. having servers in another state or a thousand miles away, is orders of magnitude higher. This new model therefore opened up all types of 'scalping' opportunities based on the ability to have data milliseconds before the competition and therefore to front-run all types of trades. In the meantime, the traditional retail investor has generally abandoned the market in disgust while traditional market makers were forced out of business by the intense price competition. Therefore 'natural' buying and selling was replaced by this manic high turnover-based volume with up to 70% of it performed by HFT machines. The difference however, is that these new HFT firms masquerade as market makers but they do not take on any of the traditional obligations of true market maker - i.e. buyer of last resort and seller of last resort. Hence, the Flash Crash of May 2010, when all of these HFTs pulled back from the market at the same time...
