4 ms·

I don’t understand. What does it mean that they sell order flow to high freq traders? How are they fucking me?

by annamargot 8y ago

rapsey 8y ago
HFT is front running.
- naveen99 8y ago
  How do you front run a limit order ?
  - mathattack 8y ago
    If you know what other people are doing you can cut in front of them. You can beat someone to the punch who may have traded better than the limit. It’s worth $26 on a 100K transaction for the HFT firms. So let’s say it’s worth $50 to them. Not s big deal if you buy and hold forever. If you day 20 times a year because you think it’s free, that $50 times 20 becomes $1000, or 1% of your stake.
  - guiambros 8y ago
    Imagine you place a limit order at $101. The HFT sees the stock dropping to $100. The HFT then has the option to buy the stock at 100 and sell to you for 101, making $1/stock profit. On the other hand, imagine the stock is currently trading at 105. The limit order will hang there, waiting for the price to drop below the limit you specified (and either never gets executed, or then becomes the flow above). Rinse and repeat. Note they don't need to make money in every transaction, but the bigger the order flow, the more opportunities they have to make profit on top of traders.
    - refurb 8y ago
      Hopefully someone who knows more than me will come along, but can you front run a limit order? Say the price of the stock is $101. You place a limit order for $100. HFT sees that but can’t do anything since the stock price is above the limit. Stock price drops to $99.5. Your order is the executed by the exchange before the HFT can buy at $99.5 and sell to you at $100.
      - OldHand2018 8y ago
        The exchange is where the orders are executed, but the exchange doesn't execute the orders. The market makers do that job. Look at the companies listed in the disclosures. Citadel appears to have the largest share in all of the examples listed. Their website [1] claims that: > We act as a specialist or market maker in more than 3,000 U.S. listed-options names, representing 99% of traded volume, and rank as a top liquidity provider on the major U.S. options exchanges, executing approximately 39% of all U.S.-listed retail volume, making us the industry’s top wholesale market maker. Citadel is paying Robinhood to put your limit order into their system at the NYSE or NASDAQ or whatever other exchange and then they handle the execution of it. Also, I don't believe that this article is claiming that Citadel et al are the high frequency traders, but that the high frequency traders are connected to their platforms and profiting (in some unspecified manner) from the orders that come in. [1] https://www.citadelsecurities.com/products/equities-and-options/ https://www.citadelsecurities.com/products/equities-and-opti...
        nostrademons 8y ago
        It's been over a decade (2007) since I dealt with order books, but when I was looking at this (writing a product to detect trade-throughs), it was a Reg NMS violation to execute an order for a price worse than the best listed on an exchange at the time. ...OTOH, what that product revealed was that Reg NMS violations were pretty rampant and the SEC wasn't interested in doing anything about it. You may have difficulty enforcing this.
        rapsey 8y ago
        > it was a Reg NMS violation to execute an order for a price worse than the best listed on an exchange at the time. Orders take time to process. HFT guys are fast enough to react and make money from it.
- nickthemagicman 8y ago
  What is front running?
  - grzm 8y ago
    https://en.wikipedia.org/wiki/Front_running https://en.wikipedia.org/wiki/Front_running
  - nickthemagicman 8y ago
    Interesting. So basically RobinHood has so many buyers and it lets them see a bunch of trades for a stock right before a large subset of these trades happens, then they HFT trade microseconds before the trade happens and ride the wave upwards? Or vice versa downwards?
- refurb 8y ago
  HFT and front running are two different things. HFTs could front run, but by definition don’t have to to be an HFT.
guiambros 8y ago
It means they are handing over your transaction to HFTs, who can then see your transactions ahead of everyone, and buy the stock right before and then sell to you for a higher price. Imagine you just issued a BUY order at market price; they can buy at $99.9 and sell to you for $100, making a $0.01/stock profit. Rinse and repeat millions of times per day. This is very similar to "front running" [1], but because a) this happens privately and in small quantities, and b) it is not necessarily privileged information, it's considered legal by the SEC. But it is highly questionable for sure. "Flash Boys", by Michael Lewis [2] is a great read, and goes into detail on the world of high frequency traders, and how they operate. [1] https://en.wikipedia.org/wiki/Front_running https://en.wikipedia.org/wiki/Front_running [2] https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393351599 https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393...
- noobermin 8y ago
  As long as it's 1 cent no single individual will care. As long as it's less than what a person would pay per trade elsewhere then both sides sort of win I guess... The problem I suppose is the poor chaps don't know this is what is happening.
- pochamago 8y ago
  This doesn't sound like it's fucking me, though. I'm still getting the stock for exactly what I asked, correct? I mean, hasn't Robin Hood always been upfront that they make money on the discrepancy between what buyers are willing to pay versus what sellers are willing to take? It's still a free service to me.
  - wodenokoto 8y ago
    > hasn't Robin Hood always been upfront that they make money on the discrepancy between what buyers are willing to pay versus what sellers are willing to take? No, they are quite clear on how they make money and that is not it. They, officially, make money on interests and a subscription service [1]. [1] https://support.robinhood.com/hc/en-us/articles/360001226106-How-We-Make-Money https://support.robinhood.com/hc/en-us/articles/360001226106...
sfcguyus 8y ago
1) You use a mobile phone with, 20ms? latency 2) The price displayed to you is 20ms late 3) You accept order at this price 4) The actual price might be less, so a firm can buy it and sell it slightly higher. 5) You get a fill at a better price than you thought. - There is a premium to Robin Hood vs other apps because most users are on mobile, where latency is likely to be higher.

I don’t understand. What does it mean that they sell order flow to high freq traders? How are they fucking me?

rapsey 8y ago

HFT is front running.

naveen99 8y ago
How do you front run a limit order ?
- mathattack 8y ago
  If you know what other people are doing you can cut in front of them. You can beat someone to the punch who may have traded better than the limit. It’s worth $26 on a 100K transaction for the HFT firms. So let’s say it’s worth $50 to them. Not s big deal if you buy and hold forever. If you day 20 times a year because you think it’s free, that $50 times 20 becomes $1000, or 1% of your stake.
- guiambros 8y ago
  Imagine you place a limit order at $101. The HFT sees the stock dropping to $100. The HFT then has the option to buy the stock at 100 and sell to you for 101, making $1/stock profit. On the other hand, imagine the stock is currently trading at 105. The limit order will hang there, waiting for the price to drop below the limit you specified (and either never gets executed, or then becomes the flow above). Rinse and repeat. Note they don't need to make money in every transaction, but the bigger the order flow, the more opportunities they have to make profit on top of traders.
  - refurb 8y ago
    Hopefully someone who knows more than me will come along, but can you front run a limit order? Say the price of the stock is $101. You place a limit order for $100. HFT sees that but can’t do anything since the stock price is above the limit. Stock price drops to $99.5. Your order is the executed by the exchange before the HFT can buy at $99.5 and sell to you at $100.
    - OldHand2018 8y ago
      The exchange is where the orders are executed, but the exchange doesn't execute the orders. The market makers do that job. Look at the companies listed in the disclosures. Citadel appears to have the largest share in all of the examples listed. Their website [1] claims that: > We act as a specialist or market maker in more than 3,000 U.S. listed-options names, representing 99% of traded volume, and rank as a top liquidity provider on the major U.S. options exchanges, executing approximately 39% of all U.S.-listed retail volume, making us the industry’s top wholesale market maker. Citadel is paying Robinhood to put your limit order into their system at the NYSE or NASDAQ or whatever other exchange and then they handle the execution of it. Also, I don't believe that this article is claiming that Citadel et al are the high frequency traders, but that the high frequency traders are connected to their platforms and profiting (in some unspecified manner) from the orders that come in. [1] https://www.citadelsecurities.com/products/equities-and-options/ https://www.citadelsecurities.com/products/equities-and-opti...
      - nostrademons 8y ago
        It's been over a decade (2007) since I dealt with order books, but when I was looking at this (writing a product to detect trade-throughs), it was a Reg NMS violation to execute an order for a price worse than the best listed on an exchange at the time. ...OTOH, what that product revealed was that Reg NMS violations were pretty rampant and the SEC wasn't interested in doing anything about it. You may have difficulty enforcing this.
        rapsey 8y ago
        > it was a Reg NMS violation to execute an order for a price worse than the best listed on an exchange at the time. Orders take time to process. HFT guys are fast enough to react and make money from it.
nickthemagicman 8y ago
What is front running?
- grzm 8y ago
  https://en.wikipedia.org/wiki/Front_running https://en.wikipedia.org/wiki/Front_running
- nickthemagicman 8y ago
  Interesting. So basically RobinHood has so many buyers and it lets them see a bunch of trades for a stock right before a large subset of these trades happens, then they HFT trade microseconds before the trade happens and ride the wave upwards? Or vice versa downwards?
refurb 8y ago
HFT and front running are two different things. HFTs could front run, but by definition don’t have to to be an HFT.

guiambros 8y ago

It means they are handing over your transaction to HFTs, who can then see your transactions ahead of everyone, and buy the stock right before and then sell to you for a higher price. Imagine you just issued a BUY order at market price; they can buy at $99.9 and sell to you for $100, making a $0.01/stock profit. Rinse and repeat millions of times per day. This is very similar to "front running" [1], but because a) this happens privately and in small quantities, and b) it is not necessarily privileged information, it's considered legal by the SEC. But it is highly questionable for sure. "Flash Boys", by Michael Lewis [2] is a great read, and goes into detail on the world of high frequency traders, and how they operate. [1] https://en.wikipedia.org/wiki/Front_running https://en.wikipedia.org/wiki/Front_running [2] https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393351599 https://www.amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393...

noobermin 8y ago
As long as it's 1 cent no single individual will care. As long as it's less than what a person would pay per trade elsewhere then both sides sort of win I guess... The problem I suppose is the poor chaps don't know this is what is happening.
pochamago 8y ago
This doesn't sound like it's fucking me, though. I'm still getting the stock for exactly what I asked, correct? I mean, hasn't Robin Hood always been upfront that they make money on the discrepancy between what buyers are willing to pay versus what sellers are willing to take? It's still a free service to me.
- wodenokoto 8y ago
  > hasn't Robin Hood always been upfront that they make money on the discrepancy between what buyers are willing to pay versus what sellers are willing to take? No, they are quite clear on how they make money and that is not it. They, officially, make money on interests and a subscription service [1]. [1] https://support.robinhood.com/hc/en-us/articles/360001226106-How-We-Make-Money https://support.robinhood.com/hc/en-us/articles/360001226106...

sfcguyus 8y ago

1) You use a mobile phone with, 20ms? latency 2) The price displayed to you is 20ms late 3) You accept order at this price 4) The actual price might be less, so a firm can buy it and sell it slightly higher. 5) You get a fill at a better price than you thought. - There is a premium to Robin Hood vs other apps because most users are on mobile, where latency is likely to be higher.