5 ms·

They sell the order flow. It's not front running.

hcknwscommenter 7y ago
The entity selling the order flow is not front-running, but the entity buying the order flow (market maker, HF trading firm) is basically front-running. It's just that the front running is done in a way to actually lower prices or increase liquidity for the underlying trades in the order flow being sold.
- sseveran 7y ago
  It's not basically front running. Front running is specifically when a broker gets your order and sits on it until either they or another client can trade in front of it before the market moves. Market makers want to interact with retail orders since they typically don't have size and in aggregate are either non-directional or predictably directional. This reduces the market makers risk of adverse selection.
  - hcknwscommenter 7y ago
    If you want to define front-running that way, then I agree HFTs don't front-run. But they do step in between buyers and sellers. If you want to call that something else, shrug.
    - sseveran 7y ago
      Stepping in between buyers and sellers is called market making. They smooth supply and demand across time. Also I don't define front running that way, FINRA does. https://www.finra.org/rules-guidance/rulebooks/finra-rules/5270?element_id=10860&rbid=2403 https://www.finra.org/rules-guidance/rulebooks/finra-rules/5...
      - hcknwscommenter 7y ago
        Your link contradicts your definition.
- lordnacho 7y ago
  No it isn't. I've worked at an HFT, this is not why they buy the order flow. Retail order flow is worth buying because it's what's called "non-toxic". That means the retail traders generally don't know which way the market is going, ie they are either wrong or too small to make the market move against the market maker. Contrast that to trading against a hedge fund which might have a better clue and is potentially large enough to push the market in some stock.
  - rwmj 7y ago
    I'm confused how this is valuable. If the retail traders are wrong, then why do you want that information?
    - evanpw 7y ago
      You don't want the information. You want the order, so that you can be the other side of the trade. As long as the order arrival isn't too correlated with price movements, the market maker can buy a little above the bid price and sell a little below the ask price and make some fraction of a cent on each share, on average.
    - deleted 7y ago
      [deleted]
    - blue11 7y ago
      It's called adverse selection. You don't want to be on the other side of an order from an informed trader, because the market is moving against you in the short run. In the longer run, if the big fund is more often correct than not, then you are also more likely to have made a losing trade. HFTs care mostly about the effect on the market today, so they probably don't care whether the information is correct or not, they just want to get out of the way of big moves.
      - wmeredith 7y ago
        That's super interesting
    - 7y ago

The entity selling the order flow is not front-running, but the entity buying the order flow (market maker, HF trading firm) is basically front-running. It's just that the front running is done in a way to actually lower prices or increase liquidity for the underlying trades in the order flow being sold.

sseveran 7y ago
It's not basically front running. Front running is specifically when a broker gets your order and sits on it until either they or another client can trade in front of it before the market moves. Market makers want to interact with retail orders since they typically don't have size and in aggregate are either non-directional or predictably directional. This reduces the market makers risk of adverse selection.
- hcknwscommenter 7y ago
  If you want to define front-running that way, then I agree HFTs don't front-run. But they do step in between buyers and sellers. If you want to call that something else, shrug.
  - sseveran 7y ago
    Stepping in between buyers and sellers is called market making. They smooth supply and demand across time. Also I don't define front running that way, FINRA does. https://www.finra.org/rules-guidance/rulebooks/finra-rules/5270?element_id=10860&rbid=2403 https://www.finra.org/rules-guidance/rulebooks/finra-rules/5...
    - hcknwscommenter 7y ago
      Your link contradicts your definition.
lordnacho 7y ago
No it isn't. I've worked at an HFT, this is not why they buy the order flow. Retail order flow is worth buying because it's what's called "non-toxic". That means the retail traders generally don't know which way the market is going, ie they are either wrong or too small to make the market move against the market maker. Contrast that to trading against a hedge fund which might have a better clue and is potentially large enough to push the market in some stock.
- rwmj 7y ago
  I'm confused how this is valuable. If the retail traders are wrong, then why do you want that information?
  - evanpw 7y ago
    You don't want the information. You want the order, so that you can be the other side of the trade. As long as the order arrival isn't too correlated with price movements, the market maker can buy a little above the bid price and sell a little below the ask price and make some fraction of a cent on each share, on average.
  - deleted 7y ago
    [deleted]
  - blue11 7y ago
    It's called adverse selection. You don't want to be on the other side of an order from an informed trader, because the market is moving against you in the short run. In the longer run, if the big fund is more often correct than not, then you are also more likely to have made a losing trade. HFTs care mostly about the effect on the market today, so they probably don't care whether the information is correct or not, they just want to get out of the way of big moves.
    - wmeredith 7y ago
      That's super interesting
  - 7y ago