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> 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 wha

by 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
- dsacco 9y ago
  Sure, that definition is fine. > 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. This practice is expressly forbidden by the SEC. Traders are not allowed to act on nonpublic information to trade ahead of customers lacking that knowledge. The key terms here are “advance” and “nonpublic.” “Advance knowledge” and “nonpublic information” refer to information that other market participants could not have had without breaking a confidentiality agreement or a fiduciary duty. It does not refer to information which is merely difficult to find nor does it refer to information which is public but unevenly distributed. HFT firms cannot see your orders before the exchange receives them and executes them. They are further not obligated to a confidential or fiduciary duty with respect to your interactions with the exchange once the orders are executed, and the order flow is technically “public” once broadcasted by the exchange. HFT firms are very fast, but they are fundamentally operating by the same processes as other market participants. They purchase order flow, use colocation and write extremely low latency bespoke trading software, but they are not intrinsically doing something that bypasses the normal operating procedure of the markets. Information asymmetry is not illegal if you’ve “earned” it, in the same way that you can “insider trade” if you come upon “secret” information without breaking a confidentiality agreement or fiduciary duty. There are legitimate arguments that can be made against HFT, but starting off with “front-running” is absolutely not one of them. You need to levy an argument that the same processes of information asymmetry break down in ways that are bad for overall market efficiency and price discovery at high speed, not that HFT firms are doing something other than “information asymmetry, fast.” And this is a hard argument to make in full view of the liquidity offered to the market by automated market making algorithms, i.e. HFT.
  - cowpig 9y ago
    Your argument is that latency-based front-running isn't front-running because the front-runners "earned it" via whatever system they built to front-run the trades. > HFT firms are very fast, but they are fundamentally operating by the same processes This is the key part I disagree with. A lot of firms set up shop right next to exchanges and built fiber optic connections between them, so that it's impossible for anyone without such a setup to trade on the same information. I don't see how you could interpret that as "good" for anyone other than the HFT firms who do it best. It's pretty clearly this: >bad for overall market efficiency

by dsacco 9y ago

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

dsacco 9y ago
Sure, that definition is fine. > 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. This practice is expressly forbidden by the SEC. Traders are not allowed to act on nonpublic information to trade ahead of customers lacking that knowledge. The key terms here are “advance” and “nonpublic.” “Advance knowledge” and “nonpublic information” refer to information that other market participants could not have had without breaking a confidentiality agreement or a fiduciary duty. It does not refer to information which is merely difficult to find nor does it refer to information which is public but unevenly distributed. HFT firms cannot see your orders before the exchange receives them and executes them. They are further not obligated to a confidential or fiduciary duty with respect to your interactions with the exchange once the orders are executed, and the order flow is technically “public” once broadcasted by the exchange. HFT firms are very fast, but they are fundamentally operating by the same processes as other market participants. They purchase order flow, use colocation and write extremely low latency bespoke trading software, but they are not intrinsically doing something that bypasses the normal operating procedure of the markets. Information asymmetry is not illegal if you’ve “earned” it, in the same way that you can “insider trade” if you come upon “secret” information without breaking a confidentiality agreement or fiduciary duty. There are legitimate arguments that can be made against HFT, but starting off with “front-running” is absolutely not one of them. You need to levy an argument that the same processes of information asymmetry break down in ways that are bad for overall market efficiency and price discovery at high speed, not that HFT firms are doing something other than “information asymmetry, fast.” And this is a hard argument to make in full view of the liquidity offered to the market by automated market making algorithms, i.e. HFT.
- cowpig 9y ago
  Your argument is that latency-based front-running isn't front-running because the front-runners "earned it" via whatever system they built to front-run the trades. > HFT firms are very fast, but they are fundamentally operating by the same processes This is the key part I disagree with. A lot of firms set up shop right next to exchanges and built fiber optic connections between them, so that it's impossible for anyone without such a setup to trade on the same information. I don't see how you could interpret that as "good" for anyone other than the HFT firms who do it best. It's pretty clearly this: >bad for overall market efficiency