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> some HFT trading does involve front-running in the sense that financial institutions invest in infrastructure to reduce latency for their HFT traders in order

by dsacco 9y ago

> some HFT trading does involve front-running in the sense that financial institutions invest in infrastructure to reduce latency for their HFT traders in order to trade on information not widely available to the public ...which is not front-running, nor is it illegal. This is exactly what I'm talking about. These words have a very specific legal definition - this is not a case of, "I wish people still used the word 'hacker' like they did in the 80s!". There is no vernacular drift; ascribing the term "front-running" to high frequency trading is virtually always incorrect. Its continued use muddles any attempt at legitimate discussion about the subject because there are several groups of people involved who: 1. understand both HFT and front-running, and do not use the latter to describe the former. 2. understand neither HFT nor front-running, and conflate the two liberally, 3. understand HFT but not front-running, and use the latter to describe the former, 4. understand front-running but not HFT, and "borrow" the former term to describe the latter (inappropriately). ...etc. Throw in ideological bias and you get a debate in which everyone talks past each other and no one learns anything.

cowpig 9y ago
I think it's pretty fair to call HFT strategies that rely on low-latency connections in order to gain a competitive advantage front-running. It's definitely front-running in the commonly-understood sense of the word, and sometimes it's specifically front-running in the sense you're talking about: a large company puts in orders for large buys on several exchanges, e.g., and a low-latency HFT sees one of them before it hits the other markets, and puts those buys in first. edit: This theoretically _will_ happen without any malicious actors, btw: HFT uses machine learning and its inputs include recent trades. Recent trades include large buys from said bank, which previous history indicates the price will go up. HFT puts the buy in. That's front-running.
- tedunangst 9y ago
  And again, making predictions about the market is not front running.
- dsacco 9y ago
  > I think it's pretty fair to call HFT strategies that rely on low-latency connections in order to gain a competitive advantage front-running. I'm not sure what you mean by "fair", but no, (again), it's not front-running. > It's definitely front-running in the commonly-understood sense of the word No, it's not. At what point do we get to come up with arbitrary definitions simply because many people misunderstand them? Would you like "front-running" to become as meaningless a term as "literally" is for emphasis? > a large company puts in orders for large buys on several exchanges, e.g., and a low-latency HFT sees one of them before it hits the other markets, and puts those buys in first. This is not how latency arbitrage works. Exchanges have a fiduciary duty to you as your trading intermediary. They may sell your order flow to other parties, such as HFT firms, but they are still liable for how that information is used. High frequency traders are not capable of seeing your order before it arrives at an exchange. While they will have order flow visibility and buy/sell positions at multiple exchanges, they also must abide by a NBBO price, which means they cannot cross the spread. You cannot bid above the best offer and skip ahead of existing orders in the book. They are free to alter their prices in reaction to orders in different exchanges, but this is designed to improve accuracy, not target any single particular trade. This also does not constitute front-running, in either the real definition or the imaginary one where they can magically skip ahead of you. > This theoretically _will_ happen without any malicious actors, btw: HFT uses machine learning and its inputs include recent trades. Recent trades include large buys from said bank, which previous history indicates the price will go up. HFT puts the buy in. That's front-running. I don't understand what you're getting at here. This is not front-running. This thread is becoming kafkaesque...do you have a problem with basic information asymmetry in the market?
  - cowpig 9y ago
    I am not sure how Franz Kafka would define it, but the NASDAQ[1] defines front-running as: > Entering into an equity trade, options or futures contracts with advance knowledge of a block transaction that will influence the price of the underlying security to capitalize on the trade[...] Can you explain how the practice I described does not fit this definition? Or provide a definition that better suits your position? [1] http://www.nasdaq.com/investing/glossary/f/front-running http://www.nasdaq.com/investing/glossary/f/front-running

by dsacco 9y ago

cowpig 9y ago

I think it's pretty fair to call HFT strategies that rely on low-latency connections in order to gain a competitive advantage front-running. It's definitely front-running in the commonly-understood sense of the word, and sometimes it's specifically front-running in the sense you're talking about: a large company puts in orders for large buys on several exchanges, e.g., and a low-latency HFT sees one of them before it hits the other markets, and puts those buys in first. edit: This theoretically _will_ happen without any malicious actors, btw: HFT uses machine learning and its inputs include recent trades. Recent trades include large buys from said bank, which previous history indicates the price will go up. HFT puts the buy in. That's front-running.

tedunangst 9y ago
And again, making predictions about the market is not front running.
dsacco 9y ago
> I think it's pretty fair to call HFT strategies that rely on low-latency connections in order to gain a competitive advantage front-running. I'm not sure what you mean by "fair", but no, (again), it's not front-running. > It's definitely front-running in the commonly-understood sense of the word No, it's not. At what point do we get to come up with arbitrary definitions simply because many people misunderstand them? Would you like "front-running" to become as meaningless a term as "literally" is for emphasis? > a large company puts in orders for large buys on several exchanges, e.g., and a low-latency HFT sees one of them before it hits the other markets, and puts those buys in first. This is not how latency arbitrage works. Exchanges have a fiduciary duty to you as your trading intermediary. They may sell your order flow to other parties, such as HFT firms, but they are still liable for how that information is used. High frequency traders are not capable of seeing your order before it arrives at an exchange. While they will have order flow visibility and buy/sell positions at multiple exchanges, they also must abide by a NBBO price, which means they cannot cross the spread. You cannot bid above the best offer and skip ahead of existing orders in the book. They are free to alter their prices in reaction to orders in different exchanges, but this is designed to improve accuracy, not target any single particular trade. This also does not constitute front-running, in either the real definition or the imaginary one where they can magically skip ahead of you. > This theoretically _will_ happen without any malicious actors, btw: HFT uses machine learning and its inputs include recent trades. Recent trades include large buys from said bank, which previous history indicates the price will go up. HFT puts the buy in. That's front-running. I don't understand what you're getting at here. This is not front-running. This thread is becoming kafkaesque...do you have a problem with basic information asymmetry in the market?
- cowpig 9y ago
  I am not sure how Franz Kafka would define it, but the NASDAQ[1] defines front-running as: > Entering into an equity trade, options or futures contracts with advance knowledge of a block transaction that will influence the price of the underlying security to capitalize on the trade[...] Can you explain how the practice I described does not fit this definition? Or provide a definition that better suits your position? [1] http://www.nasdaq.com/investing/glossary/f/front-running http://www.nasdaq.com/investing/glossary/f/front-running