4 ms·
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
by 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 agoThe 100,000 shares are sitting on the order book at different exchanges. It's not a single block being traded with a single order. That's a critical distinction.
- tptacek 13y agoIf it were a single order in the book, I'm not sure I see the advantage HFTs would have conceptually had. They're not sniffing individual orders and then outrunning them before the original order hits the exchange; they're exploiting the individual piecemeal orders that are stealthily trying to move the block. They're hunting down the orders of informed traders who are trying to exploit their own knowledge of the true price of products, and correcting the price on the market before those informed traders can take their knowledge out of everyone else's hide.
- harryh 13y agoYes exactly. A lot of people don't seem to understand this.
- kylebrown 13y agoThe institutional orders get baited to BATS BYX with "taker rebates" (on BZX the fee structure is the normal maker-rebate taker-fee, but on BYX it is reversed). It hits BYX first because the broker's router is programmed to send it there first for that rebate, but its only for a minimal amount of shares. And that's a signal which the HFT firms use to pull or front-run equivalent offers on the various other exchanges. The other big scam seems to be HFT firms buying a broker's order flow - for hundreds of millions of dollars. For example, Schwab sold its order flow to UBS for 8-year contract in 2005, for $285 million. It was massively underpriced, Schwab is said to have left a billion dollars on the table. And UBS, in turn, sold Schwab's order flow to Citadel for an undisclosed sum. Why is the right to execute a broker's order flow so valuable? Nobody seems to have a good answer, but the obvious reason is that its easy scalping.
- e40 13y agoI see a lot of heat generated in this discussion, but I don't see an answer to your second paragraph. That's the answer I want to see.
- mmodahl 13y agoIt is the easy scalping he mentioned. A market maker can only stay in business if they sell as much as they buy and if the average sale price is above their average buy price. They lose money if they provide liquidity in the way of market moving forces. Market makers try to avoid informed and "toxic" order flow and broker flow is guaranteed source of small uninformed orders that are most likely going to be crossing the spread.
- vasilipupkin 13y agoThe answer is retail flow has no information - it's the ideal flow for professional market makers to trade against
- tpeng 13y agoWhile it's true that retail flow has no information, it's also true that a broker will obtain better executions if it does not sell order flow to HFTs. http://www.elitetrader.com/vb/showthread.php?t=245029 http://www.elitetrader.com/vb/showthread.php?t=245029 https://institutions.interactivebrokers.com/en/index.php?f=1685 https://institutions.interactivebrokers.com/en/index.php?f=1...
- tpeng 13y agoI will refer you to page 96 of the book. The specific example is 100 shares of MSFT asking $30.00 and 10,000 shares asking $30.01. Because of Reg NMS, your broker is required to take down the 100 shares first ("NBBO"), allowing the HFTs to then start buying the $30.01 offer and front run the remainder of your bid. The problem with this requirement, according to Lewis, is the NBBO is priced off SIP rather than direct feeds. I don't disagree with the literal point that you are making, however, there is no need for this kind of intermediation. Why should natural traders pay intermediaries for this function? Why shouldn't they coordinate on an exchange where they don't face this tax?
- tptacek 13y agoRegNMS requires exchanges and trading centers to honor the Order Protection rule to route trades to the trading center with the best listed bid/ask price. I don't think RegNMS requires a broker-dealer like RBC to route its order to any particular exchange. Brokers already have a duty of best execution to their clients. They are allowed to use their judgement to send orders to any given exchange regardless of the NBBO. That's what enabled RBC to implement "Thor".
- tpeng 13y agoI'm not an expert but I believe you are incorrect. What you are suggesting is that the broker could perform a "trade-through", which was allowed under the old ITS rules. Under the Order Protection rule, trade-throughs of even 100 shares are explicitly prohibited. Reg NMS is very strict and that's why it is so controversial. My understanding of Thor is that it does not trade through, but it executes at all relevant exchanges near-simultaneously by delaying order routing to lower-latency exchanges. This prevents HFTs from sniffing your order at one exchange and beating you to the next.
- tptacek 13y agoI too raise my "not an expert" flag and await corrections from 'yummyfajitas or 'kasey_junk.