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I am still reading the book, but it seems like Lewis' main criticism in the book (vs. interviews) is against the so-called HFT front-running of orders that get

I am still reading the book, but it seems like Lewis' main criticism in the book (vs. interviews) is against the so-called HFT front-running of orders that get routed to multiple exchanges. He is careful to distinguish market-making/liquidity providing functions from the multi-market latency arbitrage and spends a good part of Chapter 4 exploring this distinction. Perhaps his public statements in interviews haven't been so nuanced. Also, these rebuttals to the book don't really address the front-running issue. Is it simply an unavoidable consequence of the physical reality of separate markets? Should anything be done about it? Is it even still occurring or has competition among HFTs and savvier buy-side order routing eliminated it? I would like to read a rebuttal that discusses this.

minimax 13y ago
He is careful to distinguish market-making/liquidity providing functions from the multi-market latency arbitrage I don't think the distinction is as clear as you think. If I'm making markets on several of the US equity exchanges, and I see my entire order on one side of the market at one exchange get taken, I will adjust my quotes at the other exchanges. That's not front running. It's a reasonable market making strategy.
- tpeng 13y ago
  The argument from IEX is that the exchanges intentionally price trades using slower data than what they (the exchanges) have access to. We can call it whatever we want, but natural traders would prefer an exchange that doesn't price match in this way, and have every right to move to such an exchange. http://www.zerohedge.com/news/2014-04-03/bats-admits-ceo-lied-about-hft-cnbc http://www.zerohedge.com/news/2014-04-03/bats-admits-ceo-lie...
  - kasey_junk 13y ago
    Natural large volume traders prefer an exchange that doesn't price match this way. No one is preventing them from creating a dark pool (which is what IEX is) and they already have any number of dark pools available for this sort of trading. Turns out many natural traders (Vanguard is the one that comes first to mind). Really like trading in the new HFT world as it is way cheaper than it used to be.
    - tpeng 13y ago
      Vanguard is in the business of selling index funds. It's Vanguard's incentive for mutual funds and hedge funds to face unnecessary taxes on their trades. This lowers the returns of active investing versus passive investing. What's bad for everyone else is good for Vanguard. It's true that IEX is a dark pool, and that other dark pools exist that purport to favor natural traders, but IEX is moving toward an ECN and full-fledged exchange in a staged launch. Other dark pools are highly conflicted, lack transparency, lack technical protections, and the biggest difference is that people seem to trust the principals of IEX and the incentives of the ownership structure.
      - kasey_junk 13y ago
        That trust in the principals of IEX and the ownership structure is precisely what I find so odd.
tptacek 13y ago
One of the more disingenuous things about Lewis' book (caveat: I'm only halfway through, because I'm listening to the audiobook and, on the advice of another reviewer, switched to the book _Dark Pools_ in midstream) is the rhetorical sleight of hand he plays with the term "front-running". In Lewis' universe, the price movement that happens when an informed trader tries to piecemeal-fill a 100,000 share order is "front-running". But in Larry Harris' universe†, not only is price movement during block shopping not "front-running", it is the fundamental reason for the existence of sell-side firms; in other words, the challenge of stealthily shopping 100,000 shares of thinly-traded product XYZ is the reason that Katsuyama made $2MM/yr. Lewis posits that the natural state of affairs is that there's an NBBO for XYZ, and that Katsuyama should expect his equities desk to collect fat fees simply by accepting a block order from a client, pushing a button, and unloading it at the current best bid, whereupon at the completion of this order the price will change to reflect the altered supply/demand condition of XYZ. But that is crazy. The presence of a 100,000 order changes the supply/demand conditions for XYZ. For RBC to expect to sell 100,000 shares at the current bid, it must expect to get something for nothing: to take the price hit for the increased demand of XYZ out of the hide of whoever is holding it right now. Before HFT mania, "front-running" meant something very specific: it was a problem of agency. A client/broker relationship existed, and the broker exploited it by trading in front of their client's order. The client had a right to expect the broker to act in their best interests. But the markets as a whole aren't a positive-sum system; in the absence of a contractual relationship, nobody has an obligation to act in the interests of anyone else. A dollar you make on the market is a dollar someone else didn't make. † https://news.ycombinator.com/item?id=7526783 https://news.ycombinator.com/item?id=7526783
- tpeng 13y ago
  The specific example given in the book is that an existing ask sized at 100,000 is already sitting on the order book when the buy order goes in at the ask price. The ask then disappears before the order executes. This is very different from the market moving in response to an order that has no market fill.
  - harryh 13y ago

minimax 13y ago

He is careful to distinguish market-making/liquidity providing functions from the multi-market latency arbitrage I don't think the distinction is as clear as you think. If I'm making markets on several of the US equity exchanges, and I see my entire order on one side of the market at one exchange get taken, I will adjust my quotes at the other exchanges. That's not front running. It's a reasonable market making strategy.

tpeng 13y ago
The argument from IEX is that the exchanges intentionally price trades using slower data than what they (the exchanges) have access to. We can call it whatever we want, but natural traders would prefer an exchange that doesn't price match in this way, and have every right to move to such an exchange. http://www.zerohedge.com/news/2014-04-03/bats-admits-ceo-lied-about-hft-cnbc http://www.zerohedge.com/news/2014-04-03/bats-admits-ceo-lie...
- kasey_junk 13y ago
  Natural large volume traders prefer an exchange that doesn't price match this way. No one is preventing them from creating a dark pool (which is what IEX is) and they already have any number of dark pools available for this sort of trading. Turns out many natural traders (Vanguard is the one that comes first to mind). Really like trading in the new HFT world as it is way cheaper than it used to be.
  - tpeng 13y ago
    Vanguard is in the business of selling index funds. It's Vanguard's incentive for mutual funds and hedge funds to face unnecessary taxes on their trades. This lowers the returns of active investing versus passive investing. What's bad for everyone else is good for Vanguard. It's true that IEX is a dark pool, and that other dark pools exist that purport to favor natural traders, but IEX is moving toward an ECN and full-fledged exchange in a staged launch. Other dark pools are highly conflicted, lack transparency, lack technical protections, and the biggest difference is that people seem to trust the principals of IEX and the incentives of the ownership structure.
    - kasey_junk 13y ago
      That trust in the principals of IEX and the ownership structure is precisely what I find so odd.

tptacek 13y ago

One of the more disingenuous things about Lewis' book (caveat: I'm only halfway through, because I'm listening to the audiobook and, on the advice of another reviewer, switched to the book _Dark Pools_ in midstream) is the rhetorical sleight of hand he plays with the term "front-running". In Lewis' universe, the price movement that happens when an informed trader tries to piecemeal-fill a 100,000 share order is "front-running". But in Larry Harris' universe†, not only is price movement during block shopping not "front-running", it is the fundamental reason for the existence of sell-side firms; in other words, the challenge of stealthily shopping 100,000 shares of thinly-traded product XYZ is the reason that Katsuyama made $2MM/yr. Lewis posits that the natural state of affairs is that there's an NBBO for XYZ, and that Katsuyama should expect his equities desk to collect fat fees simply by accepting a block order from a client, pushing a button, and unloading it at the current best bid, whereupon at the completion of this order the price will change to reflect the altered supply/demand condition of XYZ. But that is crazy. The presence of a 100,000 order changes the supply/demand conditions for XYZ. For RBC to expect to sell 100,000 shares at the current bid, it must expect to get something for nothing: to take the price hit for the increased demand of XYZ out of the hide of whoever is holding it right now. Before HFT mania, "front-running" meant something very specific: it was a problem of agency. A client/broker relationship existed, and the broker exploited it by trading in front of their client's order. The client had a right to expect the broker to act in their best interests. But the markets as a whole aren't a positive-sum system; in the absence of a contractual relationship, nobody has an obligation to act in the interests of anyone else. A dollar you make on the market is a dollar someone else didn't make. † https://news.ycombinator.com/item?id=7526783 https://news.ycombinator.com/item?id=7526783

tpeng 13y ago
The specific example given in the book is that an existing ask sized at 100,000 is already sitting on the order book when the buy order goes in at the ask price. The ask then disappears before the order executes. This is very different from the market moving in response to an order that has no market fill.
- harryh 13y ago