5 ms·

Consider a hypothetical stock currently trading at 34.05 bid, 34.06 ask. Trader A puts in a bid for 100 @ 34.06, matching Trader B's ask of 34.06. Normally, B w

Consider a hypothetical stock currently trading at 34.05 bid, 34.06 ask. Trader A puts in a bid for 100 @ 34.06, matching Trader B's ask of 34.06. Normally, B would then sell to A, but thanks to HFT, institute C has the unique and intrinsically unfair position of being able to fulfill A's order. Assuming a moderate holding of stock, you are then able to manipulate the market up and down second-to-second by selectively fulfilling buy or sell orders and so causing supply or demand to pile up temporarily. In a zero sum game where knowledge is power, you know exactly who is buying and who is selling - before John Q. Public knows. To compound this, you can fulfill orders using immediate or cancel (IOC) orders before they hit the markets - making it impossible for others to know how much or even whether you are buying/selling.[1] In itself, there is really not much wrong with this - market makers have been doing this for decades, possibly even centuries. And as long as there is a level playing, where everyone sees orders at the same time, there really is no problem - an invaluable service in the form of liquidity is provided. Having the advantage of being able to front run the markets is not limited to just market making, however. Limits are one of the ubiquitous features of stock markets - the ability to say, I will buy or sell X shares of this stick up until it hits price Y. This can be exploited easily by HFT/front running - you have 30 ms [2] to probe out where the limit is with small IOC transactions. In this way, you are able to meet orders at prices that are different than the currently trading price - effectively bypassing all competition. Just to respond to one of your statements from the linked post: > A common misconception is that high frequency trading is like operating a money printing machine... This is false. Peruse this Forbes article, if you will - http://blogs.forbes.com/afontevecchia/2011/02/15/bernanke-put-allows-jp-morgan-to-post-profits-on-96-9-of-2010-trading-days/ http://blogs.forbes.com/afontevecchia/2011/02/15/bernanke-pu... I am interested in any civil responses to this. I am not professing to be any sort of expert on HFT. [3] Normally I would not bother responding to posts like this, preferring to avoid talking to anyone, but your slightly condescending tone was infuriating. 1. This may not be correct, in any case, the IOC would only be of the required size and so not provide any indication of holding size. 2. http://rusingwithronestar.blogspot.com/2009/07/goldman-effectively-front-running.html http://rusingwithronestar.blogspot.com/2009/07/goldman-effec... Cannot find any mainstream media confirmations that it is indeed 30ms, but this number seems well corroborated. 3. I have used HFT and front running as synonyms because they seem to be inescapably tied together. Why the need to have picosecond advantages if you aren't trying to beat another bottom feeder to the prey? edit: bah, I really dislike how HN treats newlines - I can't find any way to simply start a new line without a space in between the two sentences. Comes out like a block of text at 1366x768, or ends up looking too spread out.

rgarcia 16y ago
Consider a hypothetical stock currently trading at 34.05 bid, 34.06 ask. Trader A puts in a bid for 100 @ 34.06, matching Trader B's ask of 34.06. Normally, B would then sell to A, but thanks to HFT, institute C has the unique and intrinsically unfair position of being able to fulfill A's order. Explain? Who is institution C? How are they able to violate time priority? Assuming a moderate holding of stock, you are then able to manipulate the market up and down second-to-second by selectively fulfilling buy or sell orders and so causing supply or demand to pile up temporarily. This is also very vague...
- socillion 16y ago
  On some stock exchanges, for example NASDAQ, you can pay a fee to be allowed access to market orders earlier than anyone else. Paired with colo services (literally your servers are next door - nearly eliminating network latency) you have a massive time advantage. Sources: http://www.nytimes.com/2009/07/24/business/24trading.html http://www.nytimes.com/2009/07/24/business/24trading.html http://www.nytimes.com/2009/08/05/business/05flash.html http://www.nytimes.com/2009/08/05/business/05flash.html Note that the SEC has not banned flash trading; it only proposed to do so - as of so far they have not done anything. The second point - it is the core of how market makers work to provide liquidity, with the added advantage of being able to see orders first. Simple supply/demand dictates that selling stock will drive the market down, since existing sell orders are not filled and slowly pile up at lower and lower prices. Then beginning to buy shares will raise the stock price temporarily, at which point the cycle repeats. Being able to figure out the limits on the buy/sell orders is simply icing. --- It appears that NASDAQ probably discontinued market front running voluntarily in late '09; I wasn't aware of that. I will have to rethink my positions - HFT as such isn't wrong in my opinion, although being able to make a profit 97% of the time (and having 3 straight quarters of only profitable days) is ridiculous, as is profiting purely from having a connection that is faster than what everyone else has.
  - vecter 16y ago
    You're point that market makers provide liquidity by flash orders is entirely false. You clearly have no understanding of how market makers actually go about their day to day business. Please don't pontificate as if you do, or if you plan to, acknowledge that you're only speculating based on marginal facts and poorly written articles (yes, even the NY Times has horribly inaccurate articles) you've gathered on the internet. In fact, that entire paragraph is pure specious reasoning. The main point that really drove it home for me was: Being able to figure out the limits on the buy/sell orders is simply icing. I can gather you have not actually tried to find a statistical trend in market prices. Simply put, it's difficult to do in practice.

rgarcia 16y ago

socillion 16y ago
On some stock exchanges, for example NASDAQ, you can pay a fee to be allowed access to market orders earlier than anyone else. Paired with colo services (literally your servers are next door - nearly eliminating network latency) you have a massive time advantage. Sources: http://www.nytimes.com/2009/07/24/business/24trading.html http://www.nytimes.com/2009/07/24/business/24trading.html http://www.nytimes.com/2009/08/05/business/05flash.html http://www.nytimes.com/2009/08/05/business/05flash.html Note that the SEC has not banned flash trading; it only proposed to do so - as of so far they have not done anything. The second point - it is the core of how market makers work to provide liquidity, with the added advantage of being able to see orders first. Simple supply/demand dictates that selling stock will drive the market down, since existing sell orders are not filled and slowly pile up at lower and lower prices. Then beginning to buy shares will raise the stock price temporarily, at which point the cycle repeats. Being able to figure out the limits on the buy/sell orders is simply icing. --- It appears that NASDAQ probably discontinued market front running voluntarily in late '09; I wasn't aware of that. I will have to rethink my positions - HFT as such isn't wrong in my opinion, although being able to make a profit 97% of the time (and having 3 straight quarters of only profitable days) is ridiculous, as is profiting purely from having a connection that is faster than what everyone else has.
- vecter 16y ago
  You're point that market makers provide liquidity by flash orders is entirely false. You clearly have no understanding of how market makers actually go about their day to day business. Please don't pontificate as if you do, or if you plan to, acknowledge that you're only speculating based on marginal facts and poorly written articles (yes, even the NY Times has horribly inaccurate articles) you've gathered on the internet. In fact, that entire paragraph is pure specious reasoning. The main point that really drove it home for me was: Being able to figure out the limits on the buy/sell orders is simply icing. I can gather you have not actually tried to find a statistical trend in market prices. Simply put, it's difficult to do in practice.