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John Arnold (former Enron energy trader) also posted something on Bloomberg View, and the main gist of the article was: Front-running is profitable against tra

by HiLo 11y ago

John Arnold (former Enron energy trader) also posted something on Bloomberg View, and the main gist of the article was: Front-running is profitable against traditional orders entered by humans. But with spoofers in the mix, the picture looks quite different: When the front-running HFT algorithm jumps ahead of a spoof order, the front-runner gets fooled and loses money. The HFT’s front-running algorithm can't easily distinguish between legitimate orders and spoofs. Suddenly the front-runner faces real market risk and makes the rational choice to do less front-running. In short, spoofing poses the risk of making front-running unprofitable. Because spoofing is only profitable if front-running exists, allowing both would ensure that neither is widespread. http://www.bloombergview.com/articles/2015-01-23/high-frequency-trading-spoofers-and-front-running http://www.bloombergview.com/articles/2015-01-23/high-freque...

zeeshanm 11y ago
That's why most of these HFT-sponsored exchanges (read: BATS, CHX, etc) pay retail brokers (e.g. eTrade, Scottrade, etc.) for their flow.
- neomantra 11y ago
  I would be interested in your source for that comment, as I think it is untrue (at least for US exchanges, I don't know rules in other countries). I am not saying payment-for-order-flow doesn't exist, but the buyers are firms like Citadel and other "internalizers", not exchanges. If by "paying" you are referring to the maker/taker rebate model, that is paid to any market participant, not just retail brokers.
  - elecengin 11y ago
    https://www.nyse.com/publicdocs/nyse/markets/liquidity-programs/arca_rlp_fact_sheet.pdf https://www.nyse.com/publicdocs/nyse/markets/liquidity-progr... http://cdn.batstrading.com/resources/release_notes/2012/BATS-Introduces-Retail-Price-Improvement-Program.pdf http://cdn.batstrading.com/resources/release_notes/2012/BATS...
    - zeeshanm 11y ago
      And these exchanges have historically been doing it. BATS has been around for about 10 years. But the initial players like Island ECN, Archipelago, and others (now merged into NSQD, NYSE, etc.) have been paying retail brokers for their flow since late 90s. This is what attracts big fishes to trade at their venues. When you do the wrong over several times without getting caught it becomes a standard (read: make-or-take rebates)
- harryh 11y ago
  Which is why retail level commissions have dropped to zero (or close to it).
elecengin 11y ago
I can't believe the article in the comment above made it on to Bloomberg View. It uses a completely incorrect definition of front-running - claiming it is a "loose" term. It isn't. Front running is illegal. It requires advanced knowledge of a customer order (as the definition linked from the article states!) That means seeing the order before it appears on a market data feed. "Gleaning" information about the order using publicly available information is not front-running. That is reacting to the market. This abuse of the term completely confuses the entire debate.
- HiLo 11y ago
  I understand your concern and do appreciate your point, but can you elaborate on why you think the definition is so black and white? Simple illegality oftentimes makes wrongdoing less clear, for example with insider trading.

by HiLo 11y ago

zeeshanm 11y ago

That's why most of these HFT-sponsored exchanges (read: BATS, CHX, etc) pay retail brokers (e.g. eTrade, Scottrade, etc.) for their flow.

neomantra 11y ago
I would be interested in your source for that comment, as I think it is untrue (at least for US exchanges, I don't know rules in other countries). I am not saying payment-for-order-flow doesn't exist, but the buyers are firms like Citadel and other "internalizers", not exchanges. If by "paying" you are referring to the maker/taker rebate model, that is paid to any market participant, not just retail brokers.
- elecengin 11y ago
  https://www.nyse.com/publicdocs/nyse/markets/liquidity-programs/arca_rlp_fact_sheet.pdf https://www.nyse.com/publicdocs/nyse/markets/liquidity-progr... http://cdn.batstrading.com/resources/release_notes/2012/BATS-Introduces-Retail-Price-Improvement-Program.pdf http://cdn.batstrading.com/resources/release_notes/2012/BATS...
  - zeeshanm 11y ago
    And these exchanges have historically been doing it. BATS has been around for about 10 years. But the initial players like Island ECN, Archipelago, and others (now merged into NSQD, NYSE, etc.) have been paying retail brokers for their flow since late 90s. This is what attracts big fishes to trade at their venues. When you do the wrong over several times without getting caught it becomes a standard (read: make-or-take rebates)
harryh 11y ago
Which is why retail level commissions have dropped to zero (or close to it).

elecengin 11y ago

I can't believe the article in the comment above made it on to Bloomberg View. It uses a completely incorrect definition of front-running - claiming it is a "loose" term. It isn't. Front running is illegal. It requires advanced knowledge of a customer order (as the definition linked from the article states!) That means seeing the order before it appears on a market data feed. "Gleaning" information about the order using publicly available information is not front-running. That is reacting to the market. This abuse of the term completely confuses the entire debate.

HiLo 11y ago
I understand your concern and do appreciate your point, but can you elaborate on why you think the definition is so black and white? Simple illegality oftentimes makes wrongdoing less clear, for example with insider trading.