4 ms·

This is great - it hits major topics that should be part of this debate. It's long, and it's a bit complicated... but so is the issue. Some things you should b

This is great - it hits major topics that should be part of this debate. It's long, and it's a bit complicated... but so is the issue. Some things you should be thinking about after reading this: * What exactly constitutes front running? Does trading based on public data (albeit in expensive feeds) constitute front running? * Large trades are almost all traded through algos. Are those algos better than proprietary "market making" algos? Why? * What is adverse selection? How do dark pools contribute? Who benefits and who suffers? Read more articles like this. Be suspicious of "simplified" discussions.

exelius 13y ago
I have some questions based on yours: * What constitutes public data? * How likely are the types of front-running HFT algos that are discussed in this article to be the old, traditional players? * What are the ethical (lol) rules against front-running your own customers if you're a market-maker? How could your customers even find out? What happens when the proprietary information is that a customer has just placed a large trade, and you drive up the price before it even hits the market? How is this fundamentally different than the commission these firms already charge?
- reverend_gonzo 13y ago
  What are the ethical (lol) rules against front-running your own customers if you're a market-maker? How could your customers even find out? What happens when the proprietary information is that a customer has just placed a large trade, and you drive up the price before it even hits the market? How is this fundamentally different than the commission these firms already charge? Market makers are generally proprietary firms that trade their own money, and don't have customers. Brokerages (ie: Scottrade) have customers and it illegal for them to front run their customers.
  - exelius 13y ago
    I'm not thinking retail brokerages -- I'm thinking investment banks like Goldman. Often the big i-banks have both prop trading operations and the ability to fill large orders for institutional clients (e.g. a pension fund looking to buy $1 billion of Apple stock).
    - reverend_gonzo 13y ago
      For them, they have a fiduciary duty to their clients to act in their customers' best interest. So, if their clients asks to purchase, for example 100,000 shares of AAPL, it would be illegal for them to first drive up the price.
- elecengin 13y ago
  Good questions. * Along with order routing, market data is heavily legislated under RegNMS as well. Both the creation of the SIP feeds (the slower consolidated data) and the rules around exchange proprietary feeds are legislated there. As part of the Fair Access Rule, exchanges cannot favor a certain participant with preferential pricing. Therefore, even if proprietary exchange data products are expensive, they are equally expensive to all participants. I consider that fair. An argument could be made that the price of the feeds is exclusionary. I do not buy this - there are many types of data available in the market that come at a high price. The next question (if you assume that the price makes it effectively non-public) is if there are effective substitutes. I think for non-professional traders (moving less than, say, $10mm notional per month) the SIP and similar feeds is acceptable (just as many retail traders accept 15min delayed market data as acceptable). For more serious traders, there may not be an acceptable substitute, but given their usage the higher costs are more justified. * Ethical rules around front running of orders is covered in the Manning Rule. In short, it prevents placing a firm's trading interests in front of a client. The details can be found at FINRA: http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=9989 http://finra.complinet.com/en/display/display.html?rbid=2403...

exelius 13y ago

I have some questions based on yours: * What constitutes public data? * How likely are the types of front-running HFT algos that are discussed in this article to be the old, traditional players? * What are the ethical (lol) rules against front-running your own customers if you're a market-maker? How could your customers even find out? What happens when the proprietary information is that a customer has just placed a large trade, and you drive up the price before it even hits the market? How is this fundamentally different than the commission these firms already charge?

reverend_gonzo 13y ago
What are the ethical (lol) rules against front-running your own customers if you're a market-maker? How could your customers even find out? What happens when the proprietary information is that a customer has just placed a large trade, and you drive up the price before it even hits the market? How is this fundamentally different than the commission these firms already charge? Market makers are generally proprietary firms that trade their own money, and don't have customers. Brokerages (ie: Scottrade) have customers and it illegal for them to front run their customers.
- exelius 13y ago
  I'm not thinking retail brokerages -- I'm thinking investment banks like Goldman. Often the big i-banks have both prop trading operations and the ability to fill large orders for institutional clients (e.g. a pension fund looking to buy $1 billion of Apple stock).
  - reverend_gonzo 13y ago
    For them, they have a fiduciary duty to their clients to act in their customers' best interest. So, if their clients asks to purchase, for example 100,000 shares of AAPL, it would be illegal for them to first drive up the price.
elecengin 13y ago
Good questions. * Along with order routing, market data is heavily legislated under RegNMS as well. Both the creation of the SIP feeds (the slower consolidated data) and the rules around exchange proprietary feeds are legislated there. As part of the Fair Access Rule, exchanges cannot favor a certain participant with preferential pricing. Therefore, even if proprietary exchange data products are expensive, they are equally expensive to all participants. I consider that fair. An argument could be made that the price of the feeds is exclusionary. I do not buy this - there are many types of data available in the market that come at a high price. The next question (if you assume that the price makes it effectively non-public) is if there are effective substitutes. I think for non-professional traders (moving less than, say, $10mm notional per month) the SIP and similar feeds is acceptable (just as many retail traders accept 15min delayed market data as acceptable). For more serious traders, there may not be an acceptable substitute, but given their usage the higher costs are more justified. * Ethical rules around front running of orders is covered in the Manning Rule. In short, it prevents placing a firm's trading interests in front of a client. The details can be found at FINRA: http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=9989 http://finra.complinet.com/en/display/display.html?rbid=2403...