3 ms·

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 a

• 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
    • dsacco 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. It’s not front-running. > This is the key part I disagree with. You’re not just disagreeing, you’re incorrect by definition. I explained why in my last comment. It’s not front-running to gain an advantage through capital expenditure. Capital expenditure (like colocation) is not fundamentally an advantage other market participants don’t have. It doesn’t matter if you think it is, it’s not. Insider trading is an example of an advantage that is fundamentally unavailable to other market participants. If we accept your argument, we might as well say that spending more money than competitors to build a better performing fund is unfair. > 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 No, it’s very clearly not, for anyone who has worked in finance or who is familiar with how market making works. High frequency traders improve net liquidity in the market. Would you prefer the pit days of preferential treatment by manual market makers, or much slower (and thus less accurate) price discovery? I don’t know what else to tell you at this point. You have done exactly the thing I was talking about in my original comment. I’ve explained to you that high frequency trading does not satisfy any legal definition of front-running. You’re free to make up an arbitrary definition of front-running, but it’s not the correct definition. Do you need me to cite research showing why high frequency trading improves liquidity and explaining why it can’t step in front of other retail traders’ orders?