7 ms·

Market makers aren't agents/brokers. They do not have clients.

tptacek 8y ago
Right, and races between mutually disinterested market participants aren't frontrunning, which is what I assume the subtext of that comment was.
- BubRoss 8y ago
  Except one party doesn't realize it is a race.
  - tptacek 8y ago
    That doesn't matter. The actual offense of frontrunning involves an agent-principle relationship between the parties.
- phildaian 8y ago
  Author of the paper here. I justified our use of the word "frontrunning" on a Twitter thread: https://twitter.com/phildaian/status/1116698738343460864 https://twitter.com/phildaian/status/1116698738343460864 There are a few different points here. Firstly, there are plenty of unambiguous definitions of frontrunning that are accepted by the scientific community that this blatantly does fall under; see the Clark SoK we cite in our paper for this in the blockchain space, or the definition Wikipedia uses, which was from an economics article by Khan & Lu (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1140694 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1140694): "trading by some parties in advance of large trades by other parties, in anticipation of profiting from the price movement that follows the large trade." The second point here is even if you want to restrict the definition to require privileged information, privilege in p2p networks is not binary: there are some nodes that are better peered on the topology, have better mining equipment, etc. who can use these privileges to extract market rent, harming the security of a blockchain. This is a complex and dense paper that took 8 people 18 months to produce, and I recommend you read it with an open mind, rather than having a gut reaction to whether we use your preferred definition of "frontrunning". I also recommend reading the primary source material directly, or at least my summary on Twitter - https://twitter.com/phildaian/status/1116155236433956865 https://twitter.com/phildaian/status/1116155236433956865 Happy to answer any questions!
  - scottlocklin 8y ago
    It's not a "preferred definition." Your definition of frontrunning is simply incorrect. FWIIW Michael Lewis is considered to be a serial fabulist by most people on Wall Street; his "flash boys" was a particularly egregious example of this, being a marketing effort for IEX, which was funded by friends of Michael Lewis.
    - phildaian 8y ago
      I linked you to several sources for my definitions and you haven't commented on any of them, so no idea how you could reach that conclusion. I've explained to you that even with your restrictive definition, our paper covers analogous behavior in DEXes. Yes, it's very surprising, no, shocking, that people on Wall St. are reluctant to have behaviors like this called out publicly.... I am not Michael Lewis and cannot speak to the accuracy of his facts; our work is a scientific paper backed by a lot of data currently undergoing peer review. The views on HFT and market design in the paper are similarly informed by cited work that is quite extensive in its data analysis, and peer reviewed. I recommend you read it!
      - tptacek 8y ago
        Help me understand what you're trying to say with that middle paragraph, about how "shocking" it is that people on Wall St. are reluctant to have behavior called out? To what behavior are you referring? I'll add: on Twitter you noted that virtually every HFT trader, lawyer, and quant pushed back (either to your definition or to your allusion to Lewis's unfortunate book). You seem to think that's added credibility for your argument. Isn't a near-universal rejection of that argument from subject matter experts sort of damning for the position you're trying to take?
      - scottlocklin 8y ago
        You pointed out no such thing, and regardless; no such bona fide definition of "front running" exists. You got it wrong: admitting your error would be the honest thing to do. It's OK to be wrong; that's part of science and rational enquiry. It's not OK to not admit that you're wrong. FWIIW I'm not on Wall Street; I work in tech. Wrong again. Your results are both trivial and basically linkbait. Everyone who knows what a time priority order book is knows there are stale orders on DEX exchanges. The fact that people are arbing them is markets doing what they're supposed to do; creating one price across disconnected markets. Anyone who knows what they're doing and uses a DEX knows this; DEXes are for people who for whatever reason can't use central exchanges, or for smart contracts that are less concerned with getting the best price marked to the millisecond. In fact I pointed out the stale order issue to people who created the one of the more popular DEX protocols over lunch. They pointed out what DEXes are for. I guess nobody sent you the memo. It's OK to not know this; I didn't know. Personally I think they're bloody stupid, but you making their use out to be something sinister or poorly understood is ... well, a lot like Michael Lewis paranoid lunacy. I realize you're not Michael Lewis, but you're taking on the title of his execrable book to sell ... something much less science fictiony and exploitative than his tall tales, but still fairly off the mark.
chatmasta 8y ago
In the case that they also run the exchange where they are making the market, they most certainly do have clients.
- Misdicorl 8y ago
  This doesn't happen; you have no idea what you're talking about.
  - chatmasta 8y ago
    Are you still talking about crypto exchanges?
bunderbunder 8y ago
I think that the definition in the parent's comment is erroneous. You don't have to be a market maker in order to front run; any broker-dealer can do it. That said, I think you're off a bit on the nomenclature, too. Market makers can indeed have clients. For example, [1] is a list of the Chicago Mercantile Exchange's market makers for equity options. Citigroup, which has clients out the wazoo, is on the list. It's (presumably) just that the market making operations themselves are not done on behalf of a client. You're maybe conflating the concept of a market maker with that of a proprietary trading firm. It's very common for market makers to be prop shops. Prop shops, by virtue of not having clients of their own, are perhaps some of the least-well-positioned firms to engage in frontrunning. But a player like Citigroup or Goldman Sachs (which does a fair bit of currency and interest options market making) could have a relatively easy time of it. [1]: https://www.cmegroup.com/trading/equity-index/e-mini-equity-index-options-rfq-contact-directory.html https://www.cmegroup.com/trading/equity-index/e-mini-equity-...
- JumpCrisscross 8y ago
  > Market makers can indeed have clients Market makers generally don't have clients. Once upon a time, I was a big-bank algorithmic equity derivatives market maker. We only had counterparties. Sometimes, those counterparties were our own bank's sales-trading desks. We were isolated from them, in terms of supervision and information access. (The sales-traders had clients.)
  - BonesJustice 8y ago
    I work on a market making team at a major investment bank, and I can back this up. There is a very clear and serious separation between those who trade bank funds and those who trade client funds. We are not allowed to know anything about their positions, accounts, strategies, etc. (and vice versa). Not only are there very stringent access controls in place to prevent cross-contamination, but there are physical boundaries as well. When the guy who runs the business side of our team started collaborating on a project with a team that did client trading, he had to move off our trading floor and into an office, and we had to revoke this access to, well, pretty much everything. He wasn’t allowed to go near our traders’ desks. It stayed that way until the project ended.
branchless 8y ago
banks are often also market makers

Right, and races between mutually disinterested market participants aren't frontrunning, which is what I assume the subtext of that comment was.

BubRoss 8y ago
Except one party doesn't realize it is a race.
- tptacek 8y ago
  That doesn't matter. The actual offense of frontrunning involves an agent-principle relationship between the parties.
phildaian 8y ago
Author of the paper here. I justified our use of the word "frontrunning" on a Twitter thread: https://twitter.com/phildaian/status/1116698738343460864 https://twitter.com/phildaian/status/1116698738343460864 There are a few different points here. Firstly, there are plenty of unambiguous definitions of frontrunning that are accepted by the scientific community that this blatantly does fall under; see the Clark SoK we cite in our paper for this in the blockchain space, or the definition Wikipedia uses, which was from an economics article by Khan & Lu (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1140694 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1140694): "trading by some parties in advance of large trades by other parties, in anticipation of profiting from the price movement that follows the large trade." The second point here is even if you want to restrict the definition to require privileged information, privilege in p2p networks is not binary: there are some nodes that are better peered on the topology, have better mining equipment, etc. who can use these privileges to extract market rent, harming the security of a blockchain. This is a complex and dense paper that took 8 people 18 months to produce, and I recommend you read it with an open mind, rather than having a gut reaction to whether we use your preferred definition of "frontrunning". I also recommend reading the primary source material directly, or at least my summary on Twitter - https://twitter.com/phildaian/status/1116155236433956865 https://twitter.com/phildaian/status/1116155236433956865 Happy to answer any questions!
- scottlocklin 8y ago
  It's not a "preferred definition." Your definition of frontrunning is simply incorrect. FWIIW Michael Lewis is considered to be a serial fabulist by most people on Wall Street; his "flash boys" was a particularly egregious example of this, being a marketing effort for IEX, which was funded by friends of Michael Lewis.
  - phildaian 8y ago
    I linked you to several sources for my definitions and you haven't commented on any of them, so no idea how you could reach that conclusion. I've explained to you that even with your restrictive definition, our paper covers analogous behavior in DEXes. Yes, it's very surprising, no, shocking, that people on Wall St. are reluctant to have behaviors like this called out publicly.... I am not Michael Lewis and cannot speak to the accuracy of his facts; our work is a scientific paper backed by a lot of data currently undergoing peer review. The views on HFT and market design in the paper are similarly informed by cited work that is quite extensive in its data analysis, and peer reviewed. I recommend you read it!
    - tptacek 8y ago
      Help me understand what you're trying to say with that middle paragraph, about how "shocking" it is that people on Wall St. are reluctant to have behavior called out? To what behavior are you referring? I'll add: on Twitter you noted that virtually every HFT trader, lawyer, and quant pushed back (either to your definition or to your allusion to Lewis's unfortunate book). You seem to think that's added credibility for your argument. Isn't a near-universal rejection of that argument from subject matter experts sort of damning for the position you're trying to take?
    - scottlocklin 8y ago
      You pointed out no such thing, and regardless; no such bona fide definition of "front running" exists. You got it wrong: admitting your error would be the honest thing to do. It's OK to be wrong; that's part of science and rational enquiry. It's not OK to not admit that you're wrong. FWIIW I'm not on Wall Street; I work in tech. Wrong again. Your results are both trivial and basically linkbait. Everyone who knows what a time priority order book is knows there are stale orders on DEX exchanges. The fact that people are arbing them is markets doing what they're supposed to do; creating one price across disconnected markets. Anyone who knows what they're doing and uses a DEX knows this; DEXes are for people who for whatever reason can't use central exchanges, or for smart contracts that are less concerned with getting the best price marked to the millisecond. In fact I pointed out the stale order issue to people who created the one of the more popular DEX protocols over lunch. They pointed out what DEXes are for. I guess nobody sent you the memo. It's OK to not know this; I didn't know. Personally I think they're bloody stupid, but you making their use out to be something sinister or poorly understood is ... well, a lot like Michael Lewis paranoid lunacy. I realize you're not Michael Lewis, but you're taking on the title of his execrable book to sell ... something much less science fictiony and exploitative than his tall tales, but still fairly off the mark.

chatmasta 8y ago

In the case that they also run the exchange where they are making the market, they most certainly do have clients.

Misdicorl 8y ago
This doesn't happen; you have no idea what you're talking about.
- chatmasta 8y ago
  Are you still talking about crypto exchanges?

bunderbunder 8y ago

I think that the definition in the parent's comment is erroneous. You don't have to be a market maker in order to front run; any broker-dealer can do it. That said, I think you're off a bit on the nomenclature, too. Market makers can indeed have clients. For example, [1] is a list of the Chicago Mercantile Exchange's market makers for equity options. Citigroup, which has clients out the wazoo, is on the list. It's (presumably) just that the market making operations themselves are not done on behalf of a client. You're maybe conflating the concept of a market maker with that of a proprietary trading firm. It's very common for market makers to be prop shops. Prop shops, by virtue of not having clients of their own, are perhaps some of the least-well-positioned firms to engage in frontrunning. But a player like Citigroup or Goldman Sachs (which does a fair bit of currency and interest options market making) could have a relatively easy time of it. [1]: https://www.cmegroup.com/trading/equity-index/e-mini-equity-index-options-rfq-contact-directory.html https://www.cmegroup.com/trading/equity-index/e-mini-equity-...

JumpCrisscross 8y ago
> Market makers can indeed have clients Market makers generally don't have clients. Once upon a time, I was a big-bank algorithmic equity derivatives market maker. We only had counterparties. Sometimes, those counterparties were our own bank's sales-trading desks. We were isolated from them, in terms of supervision and information access. (The sales-traders had clients.)
- BonesJustice 8y ago
  I work on a market making team at a major investment bank, and I can back this up. There is a very clear and serious separation between those who trade bank funds and those who trade client funds. We are not allowed to know anything about their positions, accounts, strategies, etc. (and vice versa). Not only are there very stringent access controls in place to prevent cross-contamination, but there are physical boundaries as well. When the guy who runs the business side of our team started collaborating on a project with a team that did client trading, he had to move off our trading floor and into an office, and we had to revoke this access to, well, pretty much everything. He wasn’t allowed to go near our traders’ desks. It stayed that way until the project ended.

branchless 8y ago

banks are often also market makers