4 ms·

The more expansive view of front running was most famously argued in Flash Boys, where "Lewis concludes that HFT is used as a method to front run orders placed

by allenz 8y ago

The more expansive view of front running was most famously argued in Flash Boys, where "Lewis concludes that HFT is used as a method to front run orders placed by investors".[1] Under this definition, yes, why should traders need a Bloomberg terminal just to remain on a level playing field? The five-second batch proposal would make the market more fair. We should compete on real information and not on microsecond latency. You say that this doesn't make sense, but I'm very interested in why. Of course, we want price updates to be timely, but why would microsecond resolution be useful? [1] https://en.wikipedia.org/wiki/Flash_Boys https://en.wikipedia.org/wiki/Flash_Boys

tptacek 8y ago
See Peter Kovac's book-length rebuttal to Flash Boys: https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-Frequency-ebook/dp/B00P0QI2M2 https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-... Lewis' book is not well-regarded. At the point where you've argued that using a Bloomberg terminal means you're front-running everyone who doesn't have one, I feel like I can end this unproductive discussion by asking: "what's a definition of front-running that would be persuasive to someone who doesn't believe that simply owning a Bloomberg terminal is unfair?"
- allenz 8y ago
  I don't want to argue semantics. I would like a straight answer on why you think that "fastest trader takes all" is a level playing field, or conversely, why implementing a batch auction format would be nonsensical. I'm agree that Lewis's book has many problems, and Kovac's book does not address batch auctions at all.
  - tptacek 8y ago
    If your whole argument is that HFT is bad because it's "front running" or "insider trading", and you can't define the terms in ways that don't also invalidate the commonplace ways everyone accesses the market today, then what we haven't isn't a mere semantic argument; it's that you don't have a coherent argument at all. Is HFT not front-running or insider trading? (I'd agree!) Then what's wrong with it? Otherwise: what's the useful definition of either of those terms that you're working from?
    - allenz 8y ago
      The problem with HFT is that it's unfair and discourages investor participation. A batch auction system would level the playing field. Obviously, HFT is currently legal and profitable; I'm talking about reforming the market.
      - tptacek 8y ago
        In what way does HFT "discourage investor participation"? Before there was high-speed electronic trading, virtually no investors were out there trying to outcompete market makers or run elaborate pairs trading strategies.
        allenz 8y ago
        That's the term the SEC uses to explain why a fair market is important. If ordinary investors and traders believe that low latency traders have systematic advantages over them, they will lose confidence in the market and choose not to participate.
        tptacek 8y ago
        There is no evidence that HFT dissuades ordinary investors from participating in the market. The Chief Investment Officer at Vanguard, the most important retail investor in the world, has repeatedly said that HFT is an unalloyed good for them: if what you do is buy stock and hold it, all HFT does is make it cheaper to execute your orders. You can also just, you know, look at stock prices and decide for yourself whether people are avoiding the stock market. I'm sure HFT does dissuade a class of day traders from participating in the market. But who cares? Electronic trading also killed the human market makers, who simply got outcompeted. The result, again, was an unalloyed good: the human market makers were crooked as a wallet full of 3 dollar bills.
        allenz 8y ago
        I think I understand your view that low latency trading is fair competition. I see that from the perspective of traders, it's unfair skimming that's literally impossible to compete with. (Compare in more corrupt days, you could literally pay NASDAQ for faster access to price information.) I am still interested in that competition improves spreads or efficiency.
  - kasey_junk 8y ago
    I'm long over arguing about HFT's fairness, but what I will say is that 'fastest trader takes all' is not a correct way to describe the current state of the world. The current state of the world is closer to 'soonest to best price' or 'soonest to best price with weird rules around quantity' for some markets. No amount of speed on the traders side will allow them to beat me on a resting order* I put in 2 months ago, even if I did it on the phone with a human broker. Their speed is a risk management feature. They don't have to have the carry risk for those 2 months that I do. But they don't have any special access to the trade at that price. *note that there is no such thing as 'the market'. There very well may be exchanges out there that have special order types that can trump mine, but they aren't common (or weren't last i was involved in HFT).
    - allenz 8y ago
      In context, I mean that the fastest trader takes all of the profit associated with the price correction in response to new information. Your example isn't relevant since you placed your order without access to the new information. In fact, after seeing the new information, you may realize that your order is now a losing trade--but too late, HFT has already arbitraged away your inefficiency.
      - tptacek 8y ago
        No, that's false. He put a standing limit order on the market weeks ago in anticipation of the market correction you're stipulating. It doesn't matter how quickly you can respond to the news; his order beats yours.
      - kasey_junk 8y ago
        You as another market participant (HFT or otherwise) , have no idea if I have access to the new information or not. In fact, the vast majority of the new information that HFT participants are getting is the order itself. My order goes in and that itself is the information that causes reactions. And thats the crux of the reason 'smart' money hates it. They want to take advantage of liquidity without it being priced correctly. Meanwhile liquidity providers (HFT) want to price it based on that order information. But note, the built in information asymmetry actually works against the HFT in that case. By the time the smart money order hits the HFT, the smart money already gotten their desires in at least part of the market. For me as 'dumb' money its largely all upside. I can get execution right now for as cheap as its ever been if that is important to me, or I can set the price I actually want to pay without being impacted by this at all. [edited for clarity]

by allenz 8y ago

tptacek 8y ago

See Peter Kovac's book-length rebuttal to Flash Boys: https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-Frequency-ebook/dp/B00P0QI2M2 https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-... Lewis' book is not well-regarded. At the point where you've argued that using a Bloomberg terminal means you're front-running everyone who doesn't have one, I feel like I can end this unproductive discussion by asking: "what's a definition of front-running that would be persuasive to someone who doesn't believe that simply owning a Bloomberg terminal is unfair?"

allenz 8y ago
I don't want to argue semantics. I would like a straight answer on why you think that "fastest trader takes all" is a level playing field, or conversely, why implementing a batch auction format would be nonsensical. I'm agree that Lewis's book has many problems, and Kovac's book does not address batch auctions at all.
- tptacek 8y ago
  If your whole argument is that HFT is bad because it's "front running" or "insider trading", and you can't define the terms in ways that don't also invalidate the commonplace ways everyone accesses the market today, then what we haven't isn't a mere semantic argument; it's that you don't have a coherent argument at all. Is HFT not front-running or insider trading? (I'd agree!) Then what's wrong with it? Otherwise: what's the useful definition of either of those terms that you're working from?
  - allenz 8y ago
    The problem with HFT is that it's unfair and discourages investor participation. A batch auction system would level the playing field. Obviously, HFT is currently legal and profitable; I'm talking about reforming the market.
    - tptacek 8y ago
      In what way does HFT "discourage investor participation"? Before there was high-speed electronic trading, virtually no investors were out there trying to outcompete market makers or run elaborate pairs trading strategies.
      - allenz 8y ago
        That's the term the SEC uses to explain why a fair market is important. If ordinary investors and traders believe that low latency traders have systematic advantages over them, they will lose confidence in the market and choose not to participate.
        tptacek 8y ago
        There is no evidence that HFT dissuades ordinary investors from participating in the market. The Chief Investment Officer at Vanguard, the most important retail investor in the world, has repeatedly said that HFT is an unalloyed good for them: if what you do is buy stock and hold it, all HFT does is make it cheaper to execute your orders. You can also just, you know, look at stock prices and decide for yourself whether people are avoiding the stock market. I'm sure HFT does dissuade a class of day traders from participating in the market. But who cares? Electronic trading also killed the human market makers, who simply got outcompeted. The result, again, was an unalloyed good: the human market makers were crooked as a wallet full of 3 dollar bills.
        allenz 8y ago
        I think I understand your view that low latency trading is fair competition. I see that from the perspective of traders, it's unfair skimming that's literally impossible to compete with. (Compare in more corrupt days, you could literally pay NASDAQ for faster access to price information.) I am still interested in that competition improves spreads or efficiency.
- kasey_junk 8y ago
  I'm long over arguing about HFT's fairness, but what I will say is that 'fastest trader takes all' is not a correct way to describe the current state of the world. The current state of the world is closer to 'soonest to best price' or 'soonest to best price with weird rules around quantity' for some markets. No amount of speed on the traders side will allow them to beat me on a resting order* I put in 2 months ago, even if I did it on the phone with a human broker. Their speed is a risk management feature. They don't have to have the carry risk for those 2 months that I do. But they don't have any special access to the trade at that price. *note that there is no such thing as 'the market'. There very well may be exchanges out there that have special order types that can trump mine, but they aren't common (or weren't last i was involved in HFT).
  - allenz 8y ago
    In context, I mean that the fastest trader takes all of the profit associated with the price correction in response to new information. Your example isn't relevant since you placed your order without access to the new information. In fact, after seeing the new information, you may realize that your order is now a losing trade--but too late, HFT has already arbitraged away your inefficiency.
    - tptacek 8y ago
      No, that's false. He put a standing limit order on the market weeks ago in anticipation of the market correction you're stipulating. It doesn't matter how quickly you can respond to the news; his order beats yours.
    - kasey_junk 8y ago
      You as another market participant (HFT or otherwise) , have no idea if I have access to the new information or not. In fact, the vast majority of the new information that HFT participants are getting is the order itself. My order goes in and that itself is the information that causes reactions. And thats the crux of the reason 'smart' money hates it. They want to take advantage of liquidity without it being priced correctly. Meanwhile liquidity providers (HFT) want to price it based on that order information. But note, the built in information asymmetry actually works against the HFT in that case. By the time the smart money order hits the HFT, the smart money already gotten their desires in at least part of the market. For me as 'dumb' money its largely all upside. I can get execution right now for as cheap as its ever been if that is important to me, or I can set the price I actually want to pay without being impacted by this at all. [edited for clarity]