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Disclaimer: I work in HFT The article uses the term "front-running" incorrectly. Front-running is where a firm places their own trades ahead of trades they're

Disclaimer: I work in HFT The article uses the term "front-running" incorrectly. Front-running is where a firm places their own trades ahead of trades they're placing for a client, to capitalize on the price movement that client order might generate. This is illegal. What the market makers in the article are doing isn't front-running. It's just being smart with their orders. And that's generally why HFTs cancel orders- they're reacting to market conditions that exist on the span of microseconds and will want to change their market positions very quickly- including canceling orders that they no longer think are suitable.

yummyfajitas 11y ago
The author put "front-running" in scare quotes for a reason. See footnote 6, where he explains he's using the term in the Michael Lewis/IEX sense.
- elecengin 11y ago
  Agreed. Matt Levine is one of the few commentators that fully understands market microstructure. The Bloomberg View linked in a different comment (by John Arnold) is horrible with terminology, though.
  - philipov 11y ago
    Doesn't the fact that he understands, and intentionally uses pejorative language make him dishonest?
    - evanpw 11y ago
      "Scare quotes ... may be used to imply that a particular expression is not necessarily how the author would have worded a concept." https://en.wikipedia.org/wiki/Scare_quotes https://en.wikipedia.org/wiki/Scare_quotes
      - aaronchall 11y ago
        Scare quotes are also bad composition. Since the author is the author, the author should word concepts correctly and take full responsibility for word choice.
        philipov 11y ago
        Not only that, scare quotes are often used precisely to misrepresent an idea and then avoid responsibility for it, which seems like a pretty dishonest rhetorical strategy to me. He's technically "not lying," but many people won't notice the footnote nor appreciate the difference. All they will hear is "front-running == should be illegal"
- mkinitcpio 11y ago
  Ah, I read that but didn't parse it as the author trying to make the distinction between (misnamed) "front-running" and actual front-running. Probably still worth pointing out, since one of the activities is illegal and harmful (uses non-public information) and the other is just reacting quickly to the public market information.
  - yummyfajitas 11y ago
    I subscribe to his column and I've read his criticism of Michael Lewis/IEX, so his snark is obvious to me. But I can see how this article in isolation might not convey that.
  - jameshart 11y ago
    One of Matt Levine's consistent themes though is that there is often a very fine line between 'just reacting quickly to public market information' and illegal insider activity, so the scare quotes may be intended to imply a degree of 'you decide if you think this is completely above board'.
    - hueving 11y ago
      No, there is rarely a fine line. It's a very obvious line of "are you trading on information on the market". An HFT doesn't even have the ability to front-run unless they are also providing a brokerage service.
  - Rimpinths 11y ago
    I've seen this type of behavior described as "order anticipation", which I think is a much better term. "Front running" means that you are using confidential information that an order will be submitted. "Order anticipation" means that are you using public information and you are anticipating that an order will be submitted.
  - w23j 11y ago
    Yep. Levine's opinion of using the term "front-running" like that is made more explicit here: http://www.bloombergview.com/articles/2015-07-07/can-you-really-game-index-funds- http://www.bloombergview.com/articles/2015-07-07/can-you-rea... Liberately quoted: '[...] man, remember when "front-running" meant something? [...] But then came "Flash Boys," [...] And now, basically any time anyone trades on public information before someone else, it's "front-running," [...]'
MathsOX 11y ago
When Matt Levine includes anything in quotes, assume it's snark. He's written lots about "front-running" being, innaproporatiedy, a catch-all term, much like HFT itself.
ConfuciusSay 11y ago
The SEC has been very recently and selectively cracking down on excessive order cancelling though, so it's not clear that it's not illegal and is "just being smart with their orders".
RockyMcNuts 11y ago
I always assumed it was to obfuscate strategies and mess with other HFTs...kind of like in poker you bet based on probability of what the other guy will do, in conjunction with your hand. Market conditions of real money players don't change in micro-seconds. For some reason this flapping of HFT strategies is a Nash equilibrium among the HFTs.
crdoconnor 11y ago
It's a legal distinction. Economically the effect is the same.
- tptacek 11y ago
  How could the economic effect be the same? In its real-world legal sense, front-running is an agent-principal problem. HFTs are not agents brokering for clients; in fact, they're usually proprietary traders.
  - crdoconnor 11y ago
    >How could the economic effect be the same? If a value trader goes and does a lot of good research on a company and then executes smart trades based upon that research they will make a profit. All well and good. If a value trader goes and does a lot of good research on a company and executes some smart trades based upon that and their broker front runs them, a substantial portion of their profits are handed over to the broker. Not good. Value trader may not bother doing all that research in future (market for lemons; equity market becomes ever more disconnected from the real world). Broker parasitically extracted the value of value trader's real world research from them. If a value trader goes and does a lot of good research on a company and executes some smart trades based upon that and an HFT detects the trade they're putting through and trades ahead of them using their superior speed, a substantial portion of their profits are, likewise, handed over to the HFT. Not good. Value trade probably won't bother doing all that research in future (market for lemons). Front running is both a principal/agent problem and a market for lemons problem.
    - tptacek 11y ago
      I'm not sure I understand the superpower you've just assigned HFTs. If a value trader does a ton of research and decides to adjust their position in a stock, exactly what is it that an HFT can do to capture "a substantial portion of their profits"?
      - cpach 11y ago
deleted 11y ago
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okegoge 11y ago
It's worth remembering that HFTs like yourself define front-running differently than others. Others often (rightfully) feel that HFTs who engage in latency arbitrage where they take advantage that everyone else is using the NBBO (because they have to), and the NBBO is lagged, are front-running assholes who extract value without creating anything. And we refer to that thieving, predatory, value-stealing activity as 'front-running', even though technically you're engaging in a slightly different activity.
- vegabook 11y ago
  I hope you understand that the thievery has been happening for centuries, millennia. There is no other way to gauge real supply and demand than to put buy and sell orders into the market yourself. HFT is doing at ultra-high speed what human market makers do all day long, and have been doing forever. Now, possibly rightly, market makers in general, through the ages, have had a bad rap. They are indeed trying to get more information than the average joe, with very clever, and risky, techniques (see below) and skimming him after having done so. Nevertheless, you must remember, that without these people/machines taking these risks, you would not have a continuous market in which to trade. You'd have a much more stepwise price action and much more risk. They're providing s service. Perhaps most controversially, being a good market maker means having some capital, so that you can wear a loss which is entirely possible during your price discovery. Thus, market makers who make money, inevitably already have money. This doesn't help their cause. But the idea that HFT per se is the problem is wrong. If you don't like HFT, you don't like finance, period. That may be a legitimate view, or not, but the two are inextricable. They are not different one from the other - HFT is simply Amazon doing what Barnes and Noble does, more efficiently (without the monopoly aspects - HFT is fiercely competitive). Without HFT, bid offers would be wider. Fact.
  - TelmoMenezes 11y ago
    > HFT is fiercely competitive For the incredibly small minority of people who can engage in it, and who enjoy special rules, maybe. For the majority of the people who's money is actually extracted by this system, it's an exclusive club. > Without HFT, bid offers would be wider. Fact. The majority of people who just want to save for retirement would prefer wider bid offers instead of having such a large chunk of money extracted from their future bank accounts. Fact. The other reason why HFT is non-competitive is that you cannot go and start a market with your own rules without being deeply in bed with the government and the financial status quo. HFT is forced down our throats by a system that calls itself capitalistic but thrives on enjoying custom-made loopholes in heavily-regulated statism.
washedup 11y ago
Exactly. I also wonder if the "canceled" orders are really just changing orders (either "cancel/replace" or "change" messages sent to the exchange) i.e. the desire to buy or sell is still there, just at a different price.
cynoclast 11y ago
I used to work in it, and this guy's right. The short, layman explanation is: They change their minds very quickly, and very frequently. Hence the H in HFT.

yummyfajitas 11y ago

The author put "front-running" in scare quotes for a reason. See footnote 6, where he explains he's using the term in the Michael Lewis/IEX sense.

elecengin 11y ago
Agreed. Matt Levine is one of the few commentators that fully understands market microstructure. The Bloomberg View linked in a different comment (by John Arnold) is horrible with terminology, though.
- philipov 11y ago
  Doesn't the fact that he understands, and intentionally uses pejorative language make him dishonest?
  - evanpw 11y ago
    "Scare quotes ... may be used to imply that a particular expression is not necessarily how the author would have worded a concept." https://en.wikipedia.org/wiki/Scare_quotes https://en.wikipedia.org/wiki/Scare_quotes
    - aaronchall 11y ago
      Scare quotes are also bad composition. Since the author is the author, the author should word concepts correctly and take full responsibility for word choice.
      - philipov 11y ago
        Not only that, scare quotes are often used precisely to misrepresent an idea and then avoid responsibility for it, which seems like a pretty dishonest rhetorical strategy to me. He's technically "not lying," but many people won't notice the footnote nor appreciate the difference. All they will hear is "front-running == should be illegal"
mkinitcpio 11y ago
Ah, I read that but didn't parse it as the author trying to make the distinction between (misnamed) "front-running" and actual front-running. Probably still worth pointing out, since one of the activities is illegal and harmful (uses non-public information) and the other is just reacting quickly to the public market information.
- yummyfajitas 11y ago
  I subscribe to his column and I've read his criticism of Michael Lewis/IEX, so his snark is obvious to me. But I can see how this article in isolation might not convey that.
- jameshart 11y ago
  One of Matt Levine's consistent themes though is that there is often a very fine line between 'just reacting quickly to public market information' and illegal insider activity, so the scare quotes may be intended to imply a degree of 'you decide if you think this is completely above board'.
  - hueving 11y ago
    No, there is rarely a fine line. It's a very obvious line of "are you trading on information on the market". An HFT doesn't even have the ability to front-run unless they are also providing a brokerage service.
- Rimpinths 11y ago
  I've seen this type of behavior described as "order anticipation", which I think is a much better term. "Front running" means that you are using confidential information that an order will be submitted. "Order anticipation" means that are you using public information and you are anticipating that an order will be submitted.
- w23j 11y ago
  Yep. Levine's opinion of using the term "front-running" like that is made more explicit here: http://www.bloombergview.com/articles/2015-07-07/can-you-really-game-index-funds- http://www.bloombergview.com/articles/2015-07-07/can-you-rea... Liberately quoted: '[...] man, remember when "front-running" meant something? [...] But then came "Flash Boys," [...] And now, basically any time anyone trades on public information before someone else, it's "front-running," [...]'

MathsOX 11y ago

When Matt Levine includes anything in quotes, assume it's snark. He's written lots about "front-running" being, innaproporatiedy, a catch-all term, much like HFT itself.

ConfuciusSay 11y ago

The SEC has been very recently and selectively cracking down on excessive order cancelling though, so it's not clear that it's not illegal and is "just being smart with their orders".

RockyMcNuts 11y ago

I always assumed it was to obfuscate strategies and mess with other HFTs...kind of like in poker you bet based on probability of what the other guy will do, in conjunction with your hand. Market conditions of real money players don't change in micro-seconds. For some reason this flapping of HFT strategies is a Nash equilibrium among the HFTs.

crdoconnor 11y ago

It's a legal distinction. Economically the effect is the same.

tptacek 11y ago
How could the economic effect be the same? In its real-world legal sense, front-running is an agent-principal problem. HFTs are not agents brokering for clients; in fact, they're usually proprietary traders.
- crdoconnor 11y ago
  >How could the economic effect be the same? If a value trader goes and does a lot of good research on a company and then executes smart trades based upon that research they will make a profit. All well and good. If a value trader goes and does a lot of good research on a company and executes some smart trades based upon that and their broker front runs them, a substantial portion of their profits are handed over to the broker. Not good. Value trader may not bother doing all that research in future (market for lemons; equity market becomes ever more disconnected from the real world). Broker parasitically extracted the value of value trader's real world research from them. If a value trader goes and does a lot of good research on a company and executes some smart trades based upon that and an HFT detects the trade they're putting through and trades ahead of them using their superior speed, a substantial portion of their profits are, likewise, handed over to the HFT. Not good. Value trade probably won't bother doing all that research in future (market for lemons). Front running is both a principal/agent problem and a market for lemons problem.
  - tptacek 11y ago
    I'm not sure I understand the superpower you've just assigned HFTs. If a value trader does a ton of research and decides to adjust their position in a stock, exactly what is it that an HFT can do to capture "a substantial portion of their profits"?
    - cpach 11y ago

deleted 11y ago

[deleted]

okegoge 11y ago

It's worth remembering that HFTs like yourself define front-running differently than others. Others often (rightfully) feel that HFTs who engage in latency arbitrage where they take advantage that everyone else is using the NBBO (because they have to), and the NBBO is lagged, are front-running assholes who extract value without creating anything. And we refer to that thieving, predatory, value-stealing activity as 'front-running', even though technically you're engaging in a slightly different activity.

vegabook 11y ago
I hope you understand that the thievery has been happening for centuries, millennia. There is no other way to gauge real supply and demand than to put buy and sell orders into the market yourself. HFT is doing at ultra-high speed what human market makers do all day long, and have been doing forever. Now, possibly rightly, market makers in general, through the ages, have had a bad rap. They are indeed trying to get more information than the average joe, with very clever, and risky, techniques (see below) and skimming him after having done so. Nevertheless, you must remember, that without these people/machines taking these risks, you would not have a continuous market in which to trade. You'd have a much more stepwise price action and much more risk. They're providing s service. Perhaps most controversially, being a good market maker means having some capital, so that you can wear a loss which is entirely possible during your price discovery. Thus, market makers who make money, inevitably already have money. This doesn't help their cause. But the idea that HFT per se is the problem is wrong. If you don't like HFT, you don't like finance, period. That may be a legitimate view, or not, but the two are inextricable. They are not different one from the other - HFT is simply Amazon doing what Barnes and Noble does, more efficiently (without the monopoly aspects - HFT is fiercely competitive). Without HFT, bid offers would be wider. Fact.
- TelmoMenezes 11y ago
  > HFT is fiercely competitive For the incredibly small minority of people who can engage in it, and who enjoy special rules, maybe. For the majority of the people who's money is actually extracted by this system, it's an exclusive club. > Without HFT, bid offers would be wider. Fact. The majority of people who just want to save for retirement would prefer wider bid offers instead of having such a large chunk of money extracted from their future bank accounts. Fact. The other reason why HFT is non-competitive is that you cannot go and start a market with your own rules without being deeply in bed with the government and the financial status quo. HFT is forced down our throats by a system that calls itself capitalistic but thrives on enjoying custom-made loopholes in heavily-regulated statism.

washedup 11y ago

Exactly. I also wonder if the "canceled" orders are really just changing orders (either "cancel/replace" or "change" messages sent to the exchange) i.e. the desire to buy or sell is still there, just at a different price.

cynoclast 11y ago

I used to work in it, and this guy's right. The short, layman explanation is: They change their minds very quickly, and very frequently. Hence the H in HFT.