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The ethical issue is that someone is deriving additional profit through an asymmetrical advantage. It's kind of an interesting ethical question actually. Perso

The ethical issue is that someone is deriving additional profit through an asymmetrical advantage. It's kind of an interesting ethical question actually. Personally it just feels wrong in some hard to define way to algorithmically determine the other sides maximum/minimum price through some process they don't have access to. I can certainly understand why you would do it but it just doesn't feel quite right. I don't think I have an ethical problem with using small orders to sound out the other party. Where it tips over into being unethical for me is if those exploratory orders are cancelled rather than fulfilled. I'm surprised its even possible to cancel your offer once someone else has accepted it.

nitrogen 16y ago
It seems somewhat like people inflating bids on eBay by incrementing their max bid by odd amounts until they hit the other bidder's max.
- varjag 16y ago
  Also, it is of note that such behavior is forbidden on eBay and many other marketplaces. Not on stock exchange though.
grandalf 16y ago
Well, keep in mind that this is just an intermediary before the trades hit the rest of the market. If the HFT had not been allowed the advanced access, then the transaction would not have been filled in the local exchange and would (or would not) have been filled by the larger market. If another participant besides the HFT algo on the local exchange had been willing to take the other side of the initial price offered, then the HFT firm would not benefit from "probing" for the price. And, what's to stop the entity buying a large quantity of shares from strategizing to account for HFT strategies? The core reason that exchanges offer an advanced look at trades is to try to pull liquidity out of parties that create no transaction fee overhead before passing it to the rest of the market. The price will never be worse than what would have occurred if the trade had been allowed to go out to the rest of the market. The author of the article is essentially just complaining that his own crude algorithm has been outsmarted.
fr0sty 16y ago
There is no way to send an 'exploratory' order as you describe and is is, as you suspect, impossible to cancel an order that has already been executed. The only way the example in the article would be if there were no other available sellers at a price below 26.41 (in which case I'm curious why an algo would bother sounding starting at the low end instead of the high end. The only ways to get such a wide market would be for all the other sellers to have disappeared (in which case the buyer is not disadvantaged by the HF algo because he is getting his order done rather than not) or for the HT algo to have made a guess that other people would be willing to pay a higher price in the future for BRCM and bought all of the shares available up to and above 26.40 which is the definition of a short-term trading strategy and, I should also add, full of risk that the price that you just pushed .30 will fall back down without you having a chance to get out hence making it a losing trade.

nitrogen 16y ago

It seems somewhat like people inflating bids on eBay by incrementing their max bid by odd amounts until they hit the other bidder's max.

varjag 16y ago
Also, it is of note that such behavior is forbidden on eBay and many other marketplaces. Not on stock exchange though.

grandalf 16y ago

Well, keep in mind that this is just an intermediary before the trades hit the rest of the market. If the HFT had not been allowed the advanced access, then the transaction would not have been filled in the local exchange and would (or would not) have been filled by the larger market. If another participant besides the HFT algo on the local exchange had been willing to take the other side of the initial price offered, then the HFT firm would not benefit from "probing" for the price. And, what's to stop the entity buying a large quantity of shares from strategizing to account for HFT strategies? The core reason that exchanges offer an advanced look at trades is to try to pull liquidity out of parties that create no transaction fee overhead before passing it to the rest of the market. The price will never be worse than what would have occurred if the trade had been allowed to go out to the rest of the market. The author of the article is essentially just complaining that his own crude algorithm has been outsmarted.

fr0sty 16y ago

There is no way to send an 'exploratory' order as you describe and is is, as you suspect, impossible to cancel an order that has already been executed. The only way the example in the article would be if there were no other available sellers at a price below 26.41 (in which case I'm curious why an algo would bother sounding starting at the low end instead of the high end. The only ways to get such a wide market would be for all the other sellers to have disappeared (in which case the buyer is not disadvantaged by the HF algo because he is getting his order done rather than not) or for the HT algo to have made a guess that other people would be willing to pay a higher price in the future for BRCM and bought all of the shares available up to and above 26.40 which is the definition of a short-term trading strategy and, I should also add, full of risk that the price that you just pushed .30 will fall back down without you having a chance to get out hence making it a losing trade.