4 ms·

A lot of people, including the author of Flash Boys, would dispute how narrow that definition is. You don't need a client for there to be a systemic problem wit

by ABCLAW 7y ago

A lot of people, including the author of Flash Boys, would dispute how narrow that definition is. You don't need a client for there to be a systemic problem with trading on everyone else's advance information when the advance information is the buy order itself. Wikipedia states, for instance: >Front running, also known as tailgating, is the prohibited practice of entering into an equity (stock) trade, option, futures contract, derivative, or security-based swap to capitalize on advance, nonpublic knowledge of a large pending transaction that will influence the price of the underlying security. No client needed.

SilasX 7y ago
Weird, I remember an earlier version of the Wikipedia article distinguishing frontrunning (client orders, you buy for yourself, you fill order) from tailgating (client orders, you fill order, you buy for yourself). Edit: And that version claimed tailgating is legal. Looks like it was in this version: https://en.wikipedia.org/w/index.php?title=Front_running&oldid=469233082#Tailgating https://en.wikipedia.org/w/index.php?title=Front_running&old...
- ABCLAW 7y ago
  Yeah, not sure why they accepted that edit. Tailgating is something entirely different.
tptacek 7y ago
Follow the cite from the Wikipedia definition you just quoted and you'll find, in the linked paper, that it goes right back to Flash Boys.
- ABCLAW 7y ago
  The definition is probably cited in a lot of places because it's literally just the definition of insider trading. Which frontrunning is a form of. A nice neutral primer on the HFT frontrunning debate can be found here, which contains a note regarding the HFT industry's attempt to advance the 'fiduciary' requirement. https://fas.org/sgp/crs/misc/R43608.pdf https://fas.org/sgp/crs/misc/R43608.pdf Matt Levine, for instance, is very firmly on the 'keep frontrunning to only mean brokers interceeding before client orders' side of the semantic battle. Charlie Munger, by contrast, had no issues calling out the entire HFT industry as 'evil' and 'legalized front-running'. All this to say, there's clearly a lot of fight over the semantics here. If you want to look at the official industry position, look at the communication between SIFMA and FINRA during the relevant time period wrt frontrunning regulations. You'll see SIFMA makes repeated reference to recognizing they have a duty in respect of customer orders, while the FINRA rules (5270, for instance) do not track this language. SIFMA attempted to conflate Rule 5270 (Front Running of Block Transactions) with Rule 5320 (Prohibition Against Trading Ahead of Customer Orders). I know a few people who have admitted in private that this strategy was not a mistake. Rule 5270 notably has no exclusionary requirement that the non-public knowledge is in respect of a client trade. Rule 5270 also contains a definition of Publicly Available Information, which requires that the trade be COMPLETED prior to it being public. To note how much of a gong show this situation was, note that in requests from SIFMA to delay the implementation of Rule 5270, FINRA said they'd grant the extension because firms needed time to train staff and retool systems - but FINRA explicitly noted that the activities prohibited under 5270 were almost all already illegal and covered by other FINRA rules. So insider trading on non-public information is illegal and that's not news. Unless everyone does it with computers for a while. The regulator would look like an idiot for charging practically the entire industry, so instead they tell people they have a few years to knock off all that silly business while giving them a stern finger wagging. But they only 'fixed' it for large orders, and then only in an official sense. The SEC hasn't done much in the way of enforcement on this point.
  - throwawaymath 7y ago
    > So insider trading on non-public information is illegal and that's not news. This is a frustratingly common misconception, but it is still incorrect. If you ascertain material nonpublic information without breaking a confidentiality agreement or fiduciary duty, you are fully allowed to trade on that research. Price discovery is a core function of a financial market. Without information asymmetry, there exists no meaningful way to signal new prices to a market. In the abstract, the only way to achieve alpha is to have an informational advantage over the market consensus. This is why the SEC is generally very careful in its terminology; to wit, you will usually see the terms "insider trading" and "illegal insider trading" distinguished. The "illegal" prefix is significant. Insider trading also refers more generally to the mundane, non-criminal trading activity of any corporate insiders. Legally trading with material nonpublic data is not insider trading by definition, because you can't legally trade on that kind of information as an insider. Take a look at the SEC's spotlight of insider trading cases[1]. Note the commonalities - a confidentiality or agreement or fiduciary duty was broken directly (e.g. by an employee of the firm involved) or indirectly (e.g. by friends or family of the employee). Likewise, consider the SEC's definition of illegal insider trading[2]. As for what Munger has said about HFT - it frustrates me to hear that he's said those things, because of the coherent criticisms you can levy against the practice, frontrunning is not one of them. It's extraordinarily frustrating to me that you're characterizing this as something debatable - it isn't! "Frontrunning" has an established, precise definition which the SEC will happily and aggressively use for litigation - HFT or otherwise. Whatever Munger's problems with HFT are, his argument would be strictly better if he dropped the inaccurate jargon and simply criticized the practice directly. In fact, I can't find a single citation in which Munger actually provides an argument for why HFT is bad or frontrunning. There are legitimate reasons you can be concerned about HFT, but Munger doesn't seem to mention them. Instead, every source I can find has him claiming HFT is wasteful or unproductive because he doesn't like the idea of people competing on nanoseconds. His overall dislike for the practice is extremely underspecified. In contrast, Levine is actually far more neutral about the activity than you've given him credit for. He has written extensively about HFT, Flash Boys, IEX, the various players involved and the peripheral industries and incentives. He might not be as personally successful or wealthy as Munger, but his take on the subject is - objectively speaking - much more well-constructed and coherent. ___________________ 1. https://www.sec.gov/spotlight/insidertrading/cases.shtml https://www.sec.gov/spotlight/insidertrading/cases.shtml 2. https://www.sec.gov/fast-answers/answersinsiderhtm.html https://www.sec.gov/fast-answers/answersinsiderhtm.html

by ABCLAW 7y ago

SilasX 7y ago

Weird, I remember an earlier version of the Wikipedia article distinguishing frontrunning (client orders, you buy for yourself, you fill order) from tailgating (client orders, you fill order, you buy for yourself). Edit: And that version claimed tailgating is legal. Looks like it was in this version: https://en.wikipedia.org/w/index.php?title=Front_running&oldid=469233082#Tailgating https://en.wikipedia.org/w/index.php?title=Front_running&old...

ABCLAW 7y ago
Yeah, not sure why they accepted that edit. Tailgating is something entirely different.

tptacek 7y ago

Follow the cite from the Wikipedia definition you just quoted and you'll find, in the linked paper, that it goes right back to Flash Boys.

ABCLAW 7y ago
The definition is probably cited in a lot of places because it's literally just the definition of insider trading. Which frontrunning is a form of. A nice neutral primer on the HFT frontrunning debate can be found here, which contains a note regarding the HFT industry's attempt to advance the 'fiduciary' requirement. https://fas.org/sgp/crs/misc/R43608.pdf https://fas.org/sgp/crs/misc/R43608.pdf Matt Levine, for instance, is very firmly on the 'keep frontrunning to only mean brokers interceeding before client orders' side of the semantic battle. Charlie Munger, by contrast, had no issues calling out the entire HFT industry as 'evil' and 'legalized front-running'. All this to say, there's clearly a lot of fight over the semantics here. If you want to look at the official industry position, look at the communication between SIFMA and FINRA during the relevant time period wrt frontrunning regulations. You'll see SIFMA makes repeated reference to recognizing they have a duty in respect of customer orders, while the FINRA rules (5270, for instance) do not track this language. SIFMA attempted to conflate Rule 5270 (Front Running of Block Transactions) with Rule 5320 (Prohibition Against Trading Ahead of Customer Orders). I know a few people who have admitted in private that this strategy was not a mistake. Rule 5270 notably has no exclusionary requirement that the non-public knowledge is in respect of a client trade. Rule 5270 also contains a definition of Publicly Available Information, which requires that the trade be COMPLETED prior to it being public. To note how much of a gong show this situation was, note that in requests from SIFMA to delay the implementation of Rule 5270, FINRA said they'd grant the extension because firms needed time to train staff and retool systems - but FINRA explicitly noted that the activities prohibited under 5270 were almost all already illegal and covered by other FINRA rules. So insider trading on non-public information is illegal and that's not news. Unless everyone does it with computers for a while. The regulator would look like an idiot for charging practically the entire industry, so instead they tell people they have a few years to knock off all that silly business while giving them a stern finger wagging. But they only 'fixed' it for large orders, and then only in an official sense. The SEC hasn't done much in the way of enforcement on this point.
- throwawaymath 7y ago
  > So insider trading on non-public information is illegal and that's not news. This is a frustratingly common misconception, but it is still incorrect. If you ascertain material nonpublic information without breaking a confidentiality agreement or fiduciary duty, you are fully allowed to trade on that research. Price discovery is a core function of a financial market. Without information asymmetry, there exists no meaningful way to signal new prices to a market. In the abstract, the only way to achieve alpha is to have an informational advantage over the market consensus. This is why the SEC is generally very careful in its terminology; to wit, you will usually see the terms "insider trading" and "illegal insider trading" distinguished. The "illegal" prefix is significant. Insider trading also refers more generally to the mundane, non-criminal trading activity of any corporate insiders. Legally trading with material nonpublic data is not insider trading by definition, because you can't legally trade on that kind of information as an insider. Take a look at the SEC's spotlight of insider trading cases[1]. Note the commonalities - a confidentiality or agreement or fiduciary duty was broken directly (e.g. by an employee of the firm involved) or indirectly (e.g. by friends or family of the employee). Likewise, consider the SEC's definition of illegal insider trading[2]. As for what Munger has said about HFT - it frustrates me to hear that he's said those things, because of the coherent criticisms you can levy against the practice, frontrunning is not one of them. It's extraordinarily frustrating to me that you're characterizing this as something debatable - it isn't! "Frontrunning" has an established, precise definition which the SEC will happily and aggressively use for litigation - HFT or otherwise. Whatever Munger's problems with HFT are, his argument would be strictly better if he dropped the inaccurate jargon and simply criticized the practice directly. In fact, I can't find a single citation in which Munger actually provides an argument for why HFT is bad or frontrunning. There are legitimate reasons you can be concerned about HFT, but Munger doesn't seem to mention them. Instead, every source I can find has him claiming HFT is wasteful or unproductive because he doesn't like the idea of people competing on nanoseconds. His overall dislike for the practice is extremely underspecified. In contrast, Levine is actually far more neutral about the activity than you've given him credit for. He has written extensively about HFT, Flash Boys, IEX, the various players involved and the peripheral industries and incentives. He might not be as personally successful or wealthy as Munger, but his take on the subject is - objectively speaking - much more well-constructed and coherent. ___________________ 1. https://www.sec.gov/spotlight/insidertrading/cases.shtml https://www.sec.gov/spotlight/insidertrading/cases.shtml 2. https://www.sec.gov/fast-answers/answersinsiderhtm.html https://www.sec.gov/fast-answers/answersinsiderhtm.html