4 ms·

Fine, I'll attempt to parse through your example. "Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and

by gd1 13y ago

Fine, I'll attempt to parse through your example. "Rather than buying Wigets-R-Us at $100/share, the HFT slips in with a, say, $99.99 offer to the seller, and offers you $100.01." So, 2 possibilities, you don't say, but you are sending a limit order to buy at $100 or a market (or marketable limit, or fill-and-kill) order to buy at $100. Apparently, you seem to be suggesting that there is a seller in the market, presumably offering at $100. Now, you seem to be suggesting that the HFT sees your order before it hits the matching engine (nonsense) and also that they can somehow re-negotiate with the seller and get him to lower his limit sell to 99.99 (I'm not sure how, do they send goons around to kneecap him if he doesn't? All in the 20 milliseconds your order is on the way to the market?). " and offers you $100.01" ...but let's assume that somehow the magic omnipotent packet-sniffing HFT knows your order is enroute to the exchange, can force market participants to lower their offers, now you're claiming that it can force you to buy at $100.01. Why didn't you send a limit buy at $100, if that's the price you wanted, you saw, and were prepared to pay? >wrapped in condescension If you want to write entire paragraphs about something you know nothing about, you're not really adding to the conversation are you? So you'll open yourself up to a little condescension.

dredmorbius 13y ago
Thanks, that's better than your first pass, though I'm still not buying the story. My social engineering effort worked though. I'll freely admit I find this confusing. And that's with having studied this shit in school and worked in the financial industry (in trading no less). There are a number of methods of getting inside or around the order book, most of which involve breaking rules. But the regulators aren't even playing catch-up, they're so far behind. HFT is very time sensitive, operating at or within the 250 microsecond window -- that's the time a light beam takes to travel 75 km. So one way of jumping in on the order is being, say, a few thousand km closer to the exchange than some other trader. As to limit orders (and you really haven't explained how the order book avoids this), by beating others to the trade on both sides of the order, the HFT can get in and spin the equity, taking a cut, or stealing your trade (you look to buy at $100, seller is at $99.99, HFT buys at $99.99 but finds a buyer at $100.01). The point is that by inserting themselves between other traders, by virtue of speed, HFTs skim a proft. It's small (and was enabled largely by decimalization), but can be made up for in volume. The saving grace is that the HFTs are up against one another (at least until they start colluding), so they're weaving complexity traps against one another that wear down the advantage. Though there's the risk of more flash crashes and other disasters resulting from processes they barely understand themselves.
- gd1 13y ago
  You're still not getting it. You send your messages on a private link to the exchange. Then the exchange processes them (either puts an order in the order book) or matches a trade, and only then publishes that this has happened on the public market feed. At which point other participants can react. This: "So one way of jumping in on the order is being, say, a few thousand km closer to the exchange than some other trader." ...is silly. No one gets to jump in front of anyone. Being closer to the exchange allows you to react quicker to a public event, but not a private one (which you can't see). In fact, even if you could somehow see someone else's TCP packets departing, from point A to the exchange, and you were in co-location next to the exchange at point B, you'd still have to get the information in their packet from point A to point B, run decision logic on it, then dispatch your own orders to the exchange (point B to the exchange). Faster than their already in-flight packet could arrive. It would still be impossible. What you're talking about is a common public misconception, that somehow the HFT bogeyman sees your order before it arrives.
  - dredmorbius 13y ago
    So ... the exchange processing the trade -- where's it getting its liquidity from? If it can't satisfy the trade internally, it's getting buy/sell orders from elsewhere, correct? Or flip this around: instead of telling me how HFTs can't arbitrage their trades, tell me what's actually happening. Because HFT's like deepwater oil drilling: it's an awfully expensive hobby to be doing if there's no profit in it. Where's the profit? And who's that coming from? Because in the world of the financial market, it is a zero-sum game, where one set of traders extracting value means another set isn't getting it. It's not as if they're building widgets for a value-added proposition. I've seen the HFT trade price-seeking patterns -- bandsaw and crop circle visualizations from NANEX (this is now a few years old, so ancient history, but): http://www.nanex.net/FlashCrash/CCircleDay.html http://www.nanex.net/FlashCrash/CCircleDay.html The point is that by being able to generate thousands or millions of buy/sell orders, across a band of price points, the HFT is getting in on any movement faster than any slower trader. You're also not addressing straight out fraud where book is open, which is what I understand queue jumping to be. It's one thing if everyone's playing by the rules. Something tells me that's not the case. Oh yeah. That's my former officemate doing time at Club Fed for insider trading.
foobarqux 13y ago
>Now, you seem to be suggesting that the HFT sees your order before it hits the matching engine HFTs pay brokers for order flow so they get orders before they hit the exchange and decide to trade on them from their own book (at NBBO) or pass them on to the exchange. Besides jumping the order book at the exchange they get advance information on orders about to hit the market.
- gd1 13y ago
  True enough, I was discussing direct market access. If you're going through a third party, it's up to you to vet them and make sure they are trustworthy. I agree almost word-for-word with Optiver's submission on payment for order flow: http://www.optiver.com/pdf/FSA%20consultation%20on%20PFOF%20-%20Optiver%20response.pdf http://www.optiver.com/pdf/FSA%20consultation%20on%20PFOF%20... I believe brokers in the US are now legally required to reveal any such arrangements to their clients.
deleted 13y ago
[deleted]

by gd1 13y ago

dredmorbius 13y ago

Thanks, that's better than your first pass, though I'm still not buying the story. My social engineering effort worked though. I'll freely admit I find this confusing. And that's with having studied this shit in school and worked in the financial industry (in trading no less). There are a number of methods of getting inside or around the order book, most of which involve breaking rules. But the regulators aren't even playing catch-up, they're so far behind. HFT is very time sensitive, operating at or within the 250 microsecond window -- that's the time a light beam takes to travel 75 km. So one way of jumping in on the order is being, say, a few thousand km closer to the exchange than some other trader. As to limit orders (and you really haven't explained how the order book avoids this), by beating others to the trade on both sides of the order, the HFT can get in and spin the equity, taking a cut, or stealing your trade (you look to buy at $100, seller is at $99.99, HFT buys at $99.99 but finds a buyer at $100.01). The point is that by inserting themselves between other traders, by virtue of speed, HFTs skim a proft. It's small (and was enabled largely by decimalization), but can be made up for in volume. The saving grace is that the HFTs are up against one another (at least until they start colluding), so they're weaving complexity traps against one another that wear down the advantage. Though there's the risk of more flash crashes and other disasters resulting from processes they barely understand themselves.

gd1 13y ago
You're still not getting it. You send your messages on a private link to the exchange. Then the exchange processes them (either puts an order in the order book) or matches a trade, and only then publishes that this has happened on the public market feed. At which point other participants can react. This: "So one way of jumping in on the order is being, say, a few thousand km closer to the exchange than some other trader." ...is silly. No one gets to jump in front of anyone. Being closer to the exchange allows you to react quicker to a public event, but not a private one (which you can't see). In fact, even if you could somehow see someone else's TCP packets departing, from point A to the exchange, and you were in co-location next to the exchange at point B, you'd still have to get the information in their packet from point A to point B, run decision logic on it, then dispatch your own orders to the exchange (point B to the exchange). Faster than their already in-flight packet could arrive. It would still be impossible. What you're talking about is a common public misconception, that somehow the HFT bogeyman sees your order before it arrives.
- dredmorbius 13y ago
  So ... the exchange processing the trade -- where's it getting its liquidity from? If it can't satisfy the trade internally, it's getting buy/sell orders from elsewhere, correct? Or flip this around: instead of telling me how HFTs can't arbitrage their trades, tell me what's actually happening. Because HFT's like deepwater oil drilling: it's an awfully expensive hobby to be doing if there's no profit in it. Where's the profit? And who's that coming from? Because in the world of the financial market, it is a zero-sum game, where one set of traders extracting value means another set isn't getting it. It's not as if they're building widgets for a value-added proposition. I've seen the HFT trade price-seeking patterns -- bandsaw and crop circle visualizations from NANEX (this is now a few years old, so ancient history, but): http://www.nanex.net/FlashCrash/CCircleDay.html http://www.nanex.net/FlashCrash/CCircleDay.html The point is that by being able to generate thousands or millions of buy/sell orders, across a band of price points, the HFT is getting in on any movement faster than any slower trader. You're also not addressing straight out fraud where book is open, which is what I understand queue jumping to be. It's one thing if everyone's playing by the rules. Something tells me that's not the case. Oh yeah. That's my former officemate doing time at Club Fed for insider trading.

foobarqux 13y ago

>Now, you seem to be suggesting that the HFT sees your order before it hits the matching engine HFTs pay brokers for order flow so they get orders before they hit the exchange and decide to trade on them from their own book (at NBBO) or pass them on to the exchange. Besides jumping the order book at the exchange they get advance information on orders about to hit the market.

gd1 13y ago
True enough, I was discussing direct market access. If you're going through a third party, it's up to you to vet them and make sure they are trustworthy. I agree almost word-for-word with Optiver's submission on payment for order flow: http://www.optiver.com/pdf/FSA%20consultation%20on%20PFOF%20-%20Optiver%20response.pdf http://www.optiver.com/pdf/FSA%20consultation%20on%20PFOF%20... I believe brokers in the US are now legally required to reveal any such arrangements to their clients.

deleted 13y ago

[deleted]