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If you want to know how HFT works I recommend the book Flash Boys by Michael Lews or the first 15 minutes of this talk by Brad Katsuyama (the book protagonist)

If you want to know how HFT works I recommend the book Flash Boys by Michael Lews or the first 15 minutes of this talk by Brad Katsuyama (the book protagonist) https://www.youtube.com/watch?v=N9hoqFpDjVs https://www.youtube.com/watch?v=N9hoqFpDjVs. In short, when you send an order from your computer to buy say 10000 stocks, this order gets split to all the multiple exchanges. When the order hits the first (closest) exchange, HF Traders will pick that up and race you to the rest of the exchanges and try to front run you by buying the stock in lower price if available and make an offer to your bid price that they know is coming.

growse 8y ago
> In short, when you send an order from your computer to buy say 10000 stocks, this order gets split to all the multiple exchanges. When the order hits the first (closest) exchange, HF Traders will pick that up and race you to the rest of the exchanges and try to front run you by buying the stock in lower price if available and make an offer to your bid price that they know is coming. 1. This is not 'front running', this is just other parties reacting to and executing on public market data before you. The term 'front running' is understood to mean something specific, and different. 2. Orders don't get split across multiple venues by accident. It's a conscious decision. Anyone who chooses to route multiple orders to different venues in a way that causes an information imbalance (ie, so the orders hit the venues at different times) is going to get their lunch eaten by the rest of the market. Only idiots do this - the rest of the world times their orders taking transmission latency into account.
- MuffinFlavored 8y ago
  > the rest of the world times their orders taking transmission latency into account. Could you elaborate on this please? Say I want to place an order for 100 shares of XYZ at $100.00 per share. I know my trade is going to take 50ms to get fulfilled. What do I do with this information? Predict where the price is going to be?
  - growse 8y ago
    > > the rest of the world times their orders taking transmission latency into account. > Could you elaborate on this please? Say I want to place an order for 100 shares of XYZ at $100.00 per share. I know my trade is going to take 50ms to get fulfilled. What do I do with this information? Predict where the price is going to be? Simplistically, If you're making an order that's too big for the order book on a single venue to get a sensible price, you might chop it up and buy some in NY, some in London and some in Tokyo. Let's say you're sat in NY: you can work out that it'll take your order 1ms to hit the NYSE, 150ms to hit the LSE and 600ms to hit the TSE. So rather than dumbly hitting 'transmit' on all your orders at once, you send the Tokyo order first, then then the London order 450ms later, and then the NY order 149ms after that. That way, your orders (and the public information that your making those orders) will hit each venue at exactly the same time. This is common practice for any broker or institutional trader.
- drexlspivey 8y ago
  > This is not 'front running', this is just other parties reacting to and executing on public market data before you. The term 'front running' is understood to mean something specific, and different. I guess that depends on what you consider public market data. > Front running, also known as tailgating, is the prohibited practice of entering into an equity (stock) trade on advance, nonpublic knowledge of a large pending transaction that will influence the price of the underlying security When an order hits an exchange, the exchange sends a flash order to the owners of the proprietary data feeds before sending the trade information out on the broader public markets, and making it available to all potential investors. It seems to me that the owners of those feeds have advanced knowledge of non public data.
  - growse 8y ago
    > > This is not 'front running', this is just other parties reacting to and executing on public market data before you. The term 'front running' is understood to mean something specific, and different. > I guess that depends on what you consider public market data. Usefully, the regulators define it for us. No consideration needed. > When an order hits an exchange, the exchange sends a flash order to the owners of the proprietary data feeds before sending the trade information out on the broader public markets, and making it available to all potential investors. > It seems to me that the owners of those feeds have advanced knowledge of non public data. Can anyone buy one of these feeds? If so, it's public data. "Non public" means something very specific (and different) in this context.
    - drexlspivey 8y ago
      Semantics aside, the gist of the issue is: should exchanges offer faster data feeds as a service? In a perfect world the goal of an exchange should be to facilitate fair trading not to make money by allowing sharks to feed on the rest of the participants.
      - princeb 8y ago
        anyone who wants the "faster feeds" are welcome to pay for it. hfts being able to trade on better infrastructure is no different from walmart being able to distribute soda to you at a fraction of the price they are retailing it at.
tptacek 8y ago
Flash Boys is terrible (it's not even good as a book --- and I'm an avid fan of Michael Lewis's). It's embarrassingly bad on the technical details. I like "Flash Boys: Not So Fast" as a corrective. A much better book, from another HFT skeptic, is "Dark Pools". The example you provide (of basic, naive latency arbitrage) matters for trading desks at giant investment banks. They make their money in part by selling execution services to giant holders of stock. Major trades by these people (big "blocks" being "shopped") are tradable market news. The giant holders of stock would prefer it if the news didn't get out until after their orders were filled. That's a service people like Katsuyama used to be able to offer his wealthy clients with very little effort on his part. That service has since been automated away, and it bothers him. I guess I'd be bothered too, but I'm not sure why it's moral dilemma. Front running isn't a technical problem and it has little to do with how fast traders are. It's an agency problem: a broker "front-runs" their client when they receive an order from that client and make proprietary trades against and ahead of it. Random people in the markets don't have an agency relationship with other traders and are under no obligation to avoid competing with them.
- integrate-this 8y ago
  I was an engineer for a high frequency trading desk at a firm not mentioned in this article. Flash Boys is a great book and we required our new hires to read it as it got a lot of things right. Front running is illegal now, but arbitrage opportunities still exist between exchanges. Being fast is still an easy way to make money. You're right about dark pools though. Those are the future (honestly they are already up and functioning) and they hide trading activity very well.
  - reverend_gonzo 8y ago
    Uh, being fast is not easy nor cheap. And once you are fast, you have to stay fast. Remaining fast is not easy or cheap either. Sure, if you have the part that’s really hard to get right, making money is then really easy.
  - tptacek 8y ago
    This is kind of a series of non-sequiturs. Front running has always been illegal. Arbitrage is not illegal. Latency arb certainly isn't easy. "Dark Pools" is a book. It's also a thing, but that's obviously not what I was talking about. There's nothing especially shady about dark pools. We'd call them "private exchanges" if the exchanges weren't themselves already private companies, I think.
kasey_junk 8y ago
Note, me & every other person I knew in the industry were extremely disappointed with Flash Boys. It was a submarine ad for IEX & got things just plain wrong. Feel free to read it but remember that IEX & Brad Katsuyama work on behalf of one set of market participants that are decidedly against the interests of other market participants such as retail traders.

growse 8y ago

> In short, when you send an order from your computer to buy say 10000 stocks, this order gets split to all the multiple exchanges. When the order hits the first (closest) exchange, HF Traders will pick that up and race you to the rest of the exchanges and try to front run you by buying the stock in lower price if available and make an offer to your bid price that they know is coming. 1. This is not 'front running', this is just other parties reacting to and executing on public market data before you. The term 'front running' is understood to mean something specific, and different. 2. Orders don't get split across multiple venues by accident. It's a conscious decision. Anyone who chooses to route multiple orders to different venues in a way that causes an information imbalance (ie, so the orders hit the venues at different times) is going to get their lunch eaten by the rest of the market. Only idiots do this - the rest of the world times their orders taking transmission latency into account.

MuffinFlavored 8y ago
> the rest of the world times their orders taking transmission latency into account. Could you elaborate on this please? Say I want to place an order for 100 shares of XYZ at $100.00 per share. I know my trade is going to take 50ms to get fulfilled. What do I do with this information? Predict where the price is going to be?
- growse 8y ago
  > > the rest of the world times their orders taking transmission latency into account. > Could you elaborate on this please? Say I want to place an order for 100 shares of XYZ at $100.00 per share. I know my trade is going to take 50ms to get fulfilled. What do I do with this information? Predict where the price is going to be? Simplistically, If you're making an order that's too big for the order book on a single venue to get a sensible price, you might chop it up and buy some in NY, some in London and some in Tokyo. Let's say you're sat in NY: you can work out that it'll take your order 1ms to hit the NYSE, 150ms to hit the LSE and 600ms to hit the TSE. So rather than dumbly hitting 'transmit' on all your orders at once, you send the Tokyo order first, then then the London order 450ms later, and then the NY order 149ms after that. That way, your orders (and the public information that your making those orders) will hit each venue at exactly the same time. This is common practice for any broker or institutional trader.
drexlspivey 8y ago
> This is not 'front running', this is just other parties reacting to and executing on public market data before you. The term 'front running' is understood to mean something specific, and different. I guess that depends on what you consider public market data. > Front running, also known as tailgating, is the prohibited practice of entering into an equity (stock) trade on advance, nonpublic knowledge of a large pending transaction that will influence the price of the underlying security When an order hits an exchange, the exchange sends a flash order to the owners of the proprietary data feeds before sending the trade information out on the broader public markets, and making it available to all potential investors. It seems to me that the owners of those feeds have advanced knowledge of non public data.
- growse 8y ago
  > > This is not 'front running', this is just other parties reacting to and executing on public market data before you. The term 'front running' is understood to mean something specific, and different. > I guess that depends on what you consider public market data. Usefully, the regulators define it for us. No consideration needed. > When an order hits an exchange, the exchange sends a flash order to the owners of the proprietary data feeds before sending the trade information out on the broader public markets, and making it available to all potential investors. > It seems to me that the owners of those feeds have advanced knowledge of non public data. Can anyone buy one of these feeds? If so, it's public data. "Non public" means something very specific (and different) in this context.
  - drexlspivey 8y ago
    Semantics aside, the gist of the issue is: should exchanges offer faster data feeds as a service? In a perfect world the goal of an exchange should be to facilitate fair trading not to make money by allowing sharks to feed on the rest of the participants.
    - princeb 8y ago
      anyone who wants the "faster feeds" are welcome to pay for it. hfts being able to trade on better infrastructure is no different from walmart being able to distribute soda to you at a fraction of the price they are retailing it at.

tptacek 8y ago

Flash Boys is terrible (it's not even good as a book --- and I'm an avid fan of Michael Lewis's). It's embarrassingly bad on the technical details. I like "Flash Boys: Not So Fast" as a corrective. A much better book, from another HFT skeptic, is "Dark Pools". The example you provide (of basic, naive latency arbitrage) matters for trading desks at giant investment banks. They make their money in part by selling execution services to giant holders of stock. Major trades by these people (big "blocks" being "shopped") are tradable market news. The giant holders of stock would prefer it if the news didn't get out until after their orders were filled. That's a service people like Katsuyama used to be able to offer his wealthy clients with very little effort on his part. That service has since been automated away, and it bothers him. I guess I'd be bothered too, but I'm not sure why it's moral dilemma. Front running isn't a technical problem and it has little to do with how fast traders are. It's an agency problem: a broker "front-runs" their client when they receive an order from that client and make proprietary trades against and ahead of it. Random people in the markets don't have an agency relationship with other traders and are under no obligation to avoid competing with them.

integrate-this 8y ago
I was an engineer for a high frequency trading desk at a firm not mentioned in this article. Flash Boys is a great book and we required our new hires to read it as it got a lot of things right. Front running is illegal now, but arbitrage opportunities still exist between exchanges. Being fast is still an easy way to make money. You're right about dark pools though. Those are the future (honestly they are already up and functioning) and they hide trading activity very well.
- reverend_gonzo 8y ago
  Uh, being fast is not easy nor cheap. And once you are fast, you have to stay fast. Remaining fast is not easy or cheap either. Sure, if you have the part that’s really hard to get right, making money is then really easy.
- tptacek 8y ago
  This is kind of a series of non-sequiturs. Front running has always been illegal. Arbitrage is not illegal. Latency arb certainly isn't easy. "Dark Pools" is a book. It's also a thing, but that's obviously not what I was talking about. There's nothing especially shady about dark pools. We'd call them "private exchanges" if the exchanges weren't themselves already private companies, I think.

kasey_junk 8y ago

Note, me & every other person I knew in the industry were extremely disappointed with Flash Boys. It was a submarine ad for IEX & got things just plain wrong. Feel free to read it but remember that IEX & Brad Katsuyama work on behalf of one set of market participants that are decidedly against the interests of other market participants such as retail traders.