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TL;DR: Stucchio thinks that front-running people is fine in circumstances where it's not prohibited by law. It's legal, therefore morally right, is his argumen

TL;DR: Stucchio thinks that front-running people is fine in circumstances where it's not prohibited by law. It's legal, therefore morally right, is his argument. Other people (including very many securities regulators) think that the problem here is that the law is missing a prohibition.

exelius 13y ago
You'll find this attitude (it's legal, therefore it's morally right) is very prevalent in the investment finance industry. It's as if these guys lack a moral compass of their own...
- kasey_junk 13y ago
  That sort of smear may or may not be true, but it isn't what is happening in this case. What is happening in this case is that 2 groups (large liquidity purchasers and liquidity providers) have a natural antagonistic relationship with each other. Purchaser always want to lower the price and providers want to raise it. This is good for the markets operation. But there is a PR/Power imbalance currently in the market. The large purchasers have tons of money had influence. They are using it to smear the sellers of the product they want. The sellers happen to be an easy group to smear (they are highly technical, secretive, and operate in a world that no one seems to understand). If anything is immoral in all this is that they are actively trying to obfiscate what is happening in the markets and thereby spreading fear.
  - crdoconnor 13y ago
    > The sellers happen to be an easy group to smear (they are highly technical, secretive, and operate in a world that no one seems to understand). Once you understand what it is that they are doing, it's pretty clear that it's wrong. Unfortunately, they like to muddy the issue. Hell, the OP does that every time it comes up on HN by asking people to explain what their problem with it is using obtuse industry jargon (e.g. "which part of FIX/OUCH enables front running?").
    - kasey_junk 13y ago
      This is a really late reply, and probably futile in any case, but your comments on this subject make me think you don't actually understand "what it is that they are doing". When people try to explain it to you , you accuse them of using "obtuse industry jargon". Yet you've left them little choice. An analogy (flawed as they all are) is if you came onto these forums and claimed that udp networks were evil and a tool whereby network consultants got rich on the back of "regular internet users". To back this up you pointed to some articles in People that claimed "Don't trust your UDP network, it might delete your traffic!" When anyone who actually understood networks said something like, "well it's nuanced, error checking is valuable in some cases and not valuable in others" you said, "DON'T MUDDY THE WATERS WITH YOUR JARGON!" At this point, because networking is such a widely dispersed information set, and there aren't any high profile authors backing up your assertion that "UDP IS DANGEROUS IT LOSES PACKETS!" members of this forum would start down voting you into oblivion and making cogent arguments about why you are so very, very ignorant. The only reason this hasn't happened yet is that knowledge of electronic trading systems is not as widely disseminated and every one with a 401k and a DSL modem thinks they know what electronic trading is about. I will tell you this much, everyone who has ever actually traded electronically sees your comments and thinks of you as the "UDP is evil" guy. That we are in the minority means that we can't just laugh at and/or ignore you like we could if you were claiming nonsense about networks. For all I know you are a senator. So with that said, ask a straight forward question, I will answer it without any equivocations given that they aren't covered by IP agreements.
- eudox 13y ago
  You will find the attitude almost everywhere you look. "If it is legal it is moral". Saying it's exclusively in the finance industry is absolutely delusional.
- chollida1 13y ago
  Replace investment finance industry with silicon valley and you would be just as correct.
spindritf 13y ago
Stucchio thinks that front-running people is fine in circumstances where it's not prohibited by law. It's legal, therefore morally right, is his argument. This is completely not the argument presented in the OP. "Front-running" is fine because it leads to quicker inclusion of market information in price and makes large players pay for their own large trades.
- sseveran 13y ago
  Also because it is not front running. Front running has a technical and legal definition that someone looking at a public feed does not meet.
nodata 13y ago
Using the same logic, if we were to make a law that forbade it, then he would agree that it was wrong? Perfect!
harryh 13y ago
And you think it's morally wrong even if it leads to better functioning markets with lower costs and better prices for everyone else. Also, what specific prohibition would you change in the law? And who do you think that would help?
- mike_herrera 13y ago
  > And you think it's morally wrong even if it leads to better functioning markets with lower costs and better prices for everyone else. Citation?
  - harryh 13y ago
    Citation for what? A) that jellicle thinks it's morally wrong? He certainly seems to think that. B) That costs have lowered? Spreads have dropped 10-20x in the last 10 years. Here's the CIO of Vanguard talking about how that's benefited everyone who buys one of their index funds: http://www.cnbc.com/id/49434073 http://www.cnbc.com/id/49434073
- jellicle 13y ago
  > And you think it's morally wrong even if it leads to better functioning markets with lower costs and better prices for everyone else. But it doesn't lead to any of these things. It leads to worse-functioning markets with worse prices for everyone else. Where do you think the profits made by HFT come from? The air? Ghosts? Fairies?
  - harryh 13y ago
    Market makers have always made money. They now make DRAMATICALLY LESS money than they used to due to automation. Here's the Vanguard CIO saying the same thing: http://www.cnbc.com/id/49434073 http://www.cnbc.com/id/49434073 You realize that spreads used to be 12.5 cents or 25 cents and now they're generally 1 cent right?
    - nhaehnle 13y ago
kasey_junk 13y ago
One of the single biggest problems with discussions on HFT is a lack of rigour in the use of terms that mean specific things. Front-running is a specific thing, someone who has a duty to you to execute on your behalf instead executing on their own behalf. Large market participants have started co-opting this term to mean, "not allowing us to hide our huge information advantage and thereby screw the rest of the market". They do this because they know the idea of a market run by computers scares people and most people have heard the term front-running and know that it is wrong. They are trying to bypass market dynamics for their own gain, to the detriment of everyone else through public relations/regulation.
- crdoconnor 13y ago
  The only difference between front running and what HFTs do is that they've found a loophole whereby they don't have to be your broker to figure out what your trades are in advance.
  - dllthomas 13y ago
    They can guess at what your trades are. They necessarily still have less information than you do.
daveed 13y ago
One of the problems with this whole issue is that people are prone to looking at tl;dr's. Your comment assumes that front-running is occurring, which is not what's happening. Would you rather the debate go to: whether everyone should trade based on the SIP? But then: - What happens when the SIP goes down? Should the US markets shut down? - What is the motivation for innovation if everyone uses the SIP? One advantage of multiple markets is that they are also competing with each other to improve in terms of technology, and rates. - Why is it better to trade in a world with less information?
rayiner 13y ago
In what other context is using indications of a big buy or sell to bid up the price ahead of the big buyer or seller considered wrong? If my observation of Disney suggests they're going to buy up some land in a neighborhood to build a theme park, is it morally wrong for me to buy up the land and sell it at a higher price?
- hackinthebochs 13y ago
  Why would it not be? You're taking money from the original owner [edit: and costing the buyer more] through asymmetry of information. You are providing no service to either of the parties.
  - rayiner 13y ago
    For one piece of land, yes. But if we're talking many plots, your intervention will raise the market price and other sellers will get the benefit of the higher price.
    - bakhy 13y ago
      but the machines in the story do not actually know anything about the plans of the buyer. they are guessing. and a lot of them are involved in this guessing now. it seems logical that this would create instability.
    - hackinthebochs 13y ago
      At the expense of the buyers--those who are actually attempting to "invest" in the land (rather than speculate). If Disney decides they are going to build a theme park in some area, they should be entitled to buy the land at current market prices, not at an inflated price (solely based on information of their intention) that essentially robs Disney of profits from their own efforts. It is Disney's actions, and their expected future profits, that create value in the land. Frontrunning their purchase is unethical any way you look at it. The market will adjust as it sees fit after Disney's purchase succeeds. The land analogy is a bit strained, as those who buy stocks are necessarily betting on future earnings rather than investing their own labor into its growth. But I think the analogy holds for those who put in effort to analyse an industry and thus make buy/sell decisions based on their efforts. Frontrunning or behavior analyzing is essentially robbing a company of the fruits of their efforts. The market will adjust based on their buy/sell transaction, it does not need another middle man to adjust market price a millisecond sooner.
hft_throwaway 13y ago
How is it any different from arbitrage? If I see the price of ES move in Chicago before others and trade SPY in NY based on that, is it front-running? Somebody will make that trade, so we're really just arguing over who gets the money.

exelius 13y ago

You'll find this attitude (it's legal, therefore it's morally right) is very prevalent in the investment finance industry. It's as if these guys lack a moral compass of their own...

kasey_junk 13y ago
That sort of smear may or may not be true, but it isn't what is happening in this case. What is happening in this case is that 2 groups (large liquidity purchasers and liquidity providers) have a natural antagonistic relationship with each other. Purchaser always want to lower the price and providers want to raise it. This is good for the markets operation. But there is a PR/Power imbalance currently in the market. The large purchasers have tons of money had influence. They are using it to smear the sellers of the product they want. The sellers happen to be an easy group to smear (they are highly technical, secretive, and operate in a world that no one seems to understand). If anything is immoral in all this is that they are actively trying to obfiscate what is happening in the markets and thereby spreading fear.
- crdoconnor 13y ago
  > The sellers happen to be an easy group to smear (they are highly technical, secretive, and operate in a world that no one seems to understand). Once you understand what it is that they are doing, it's pretty clear that it's wrong. Unfortunately, they like to muddy the issue. Hell, the OP does that every time it comes up on HN by asking people to explain what their problem with it is using obtuse industry jargon (e.g. "which part of FIX/OUCH enables front running?").
  - kasey_junk 13y ago
    This is a really late reply, and probably futile in any case, but your comments on this subject make me think you don't actually understand "what it is that they are doing". When people try to explain it to you , you accuse them of using "obtuse industry jargon". Yet you've left them little choice. An analogy (flawed as they all are) is if you came onto these forums and claimed that udp networks were evil and a tool whereby network consultants got rich on the back of "regular internet users". To back this up you pointed to some articles in People that claimed "Don't trust your UDP network, it might delete your traffic!" When anyone who actually understood networks said something like, "well it's nuanced, error checking is valuable in some cases and not valuable in others" you said, "DON'T MUDDY THE WATERS WITH YOUR JARGON!" At this point, because networking is such a widely dispersed information set, and there aren't any high profile authors backing up your assertion that "UDP IS DANGEROUS IT LOSES PACKETS!" members of this forum would start down voting you into oblivion and making cogent arguments about why you are so very, very ignorant. The only reason this hasn't happened yet is that knowledge of electronic trading systems is not as widely disseminated and every one with a 401k and a DSL modem thinks they know what electronic trading is about. I will tell you this much, everyone who has ever actually traded electronically sees your comments and thinks of you as the "UDP is evil" guy. That we are in the minority means that we can't just laugh at and/or ignore you like we could if you were claiming nonsense about networks. For all I know you are a senator. So with that said, ask a straight forward question, I will answer it without any equivocations given that they aren't covered by IP agreements.
eudox 13y ago
You will find the attitude almost everywhere you look. "If it is legal it is moral". Saying it's exclusively in the finance industry is absolutely delusional.
chollida1 13y ago
Replace investment finance industry with silicon valley and you would be just as correct.

spindritf 13y ago

Stucchio thinks that front-running people is fine in circumstances where it's not prohibited by law. It's legal, therefore morally right, is his argument. This is completely not the argument presented in the OP. "Front-running" is fine because it leads to quicker inclusion of market information in price and makes large players pay for their own large trades.

sseveran 13y ago
Also because it is not front running. Front running has a technical and legal definition that someone looking at a public feed does not meet.

nodata 13y ago

Using the same logic, if we were to make a law that forbade it, then he would agree that it was wrong? Perfect!

harryh 13y ago

And you think it's morally wrong even if it leads to better functioning markets with lower costs and better prices for everyone else. Also, what specific prohibition would you change in the law? And who do you think that would help?

mike_herrera 13y ago
> And you think it's morally wrong even if it leads to better functioning markets with lower costs and better prices for everyone else. Citation?
- harryh 13y ago
  Citation for what? A) that jellicle thinks it's morally wrong? He certainly seems to think that. B) That costs have lowered? Spreads have dropped 10-20x in the last 10 years. Here's the CIO of Vanguard talking about how that's benefited everyone who buys one of their index funds: http://www.cnbc.com/id/49434073 http://www.cnbc.com/id/49434073
jellicle 13y ago
> And you think it's morally wrong even if it leads to better functioning markets with lower costs and better prices for everyone else. But it doesn't lead to any of these things. It leads to worse-functioning markets with worse prices for everyone else. Where do you think the profits made by HFT come from? The air? Ghosts? Fairies?
- harryh 13y ago
  Market makers have always made money. They now make DRAMATICALLY LESS money than they used to due to automation. Here's the Vanguard CIO saying the same thing: http://www.cnbc.com/id/49434073 http://www.cnbc.com/id/49434073 You realize that spreads used to be 12.5 cents or 25 cents and now they're generally 1 cent right?
  - nhaehnle 13y ago

kasey_junk 13y ago

One of the single biggest problems with discussions on HFT is a lack of rigour in the use of terms that mean specific things. Front-running is a specific thing, someone who has a duty to you to execute on your behalf instead executing on their own behalf. Large market participants have started co-opting this term to mean, "not allowing us to hide our huge information advantage and thereby screw the rest of the market". They do this because they know the idea of a market run by computers scares people and most people have heard the term front-running and know that it is wrong. They are trying to bypass market dynamics for their own gain, to the detriment of everyone else through public relations/regulation.

crdoconnor 13y ago
The only difference between front running and what HFTs do is that they've found a loophole whereby they don't have to be your broker to figure out what your trades are in advance.
- dllthomas 13y ago
  They can guess at what your trades are. They necessarily still have less information than you do.

daveed 13y ago

One of the problems with this whole issue is that people are prone to looking at tl;dr's. Your comment assumes that front-running is occurring, which is not what's happening. Would you rather the debate go to: whether everyone should trade based on the SIP? But then: - What happens when the SIP goes down? Should the US markets shut down? - What is the motivation for innovation if everyone uses the SIP? One advantage of multiple markets is that they are also competing with each other to improve in terms of technology, and rates. - Why is it better to trade in a world with less information?

rayiner 13y ago

In what other context is using indications of a big buy or sell to bid up the price ahead of the big buyer or seller considered wrong? If my observation of Disney suggests they're going to buy up some land in a neighborhood to build a theme park, is it morally wrong for me to buy up the land and sell it at a higher price?

hackinthebochs 13y ago
Why would it not be? You're taking money from the original owner [edit: and costing the buyer more] through asymmetry of information. You are providing no service to either of the parties.
- rayiner 13y ago
  For one piece of land, yes. But if we're talking many plots, your intervention will raise the market price and other sellers will get the benefit of the higher price.
  - bakhy 13y ago
    but the machines in the story do not actually know anything about the plans of the buyer. they are guessing. and a lot of them are involved in this guessing now. it seems logical that this would create instability.
  - hackinthebochs 13y ago
    At the expense of the buyers--those who are actually attempting to "invest" in the land (rather than speculate). If Disney decides they are going to build a theme park in some area, they should be entitled to buy the land at current market prices, not at an inflated price (solely based on information of their intention) that essentially robs Disney of profits from their own efforts. It is Disney's actions, and their expected future profits, that create value in the land. Frontrunning their purchase is unethical any way you look at it. The market will adjust as it sees fit after Disney's purchase succeeds. The land analogy is a bit strained, as those who buy stocks are necessarily betting on future earnings rather than investing their own labor into its growth. But I think the analogy holds for those who put in effort to analyse an industry and thus make buy/sell decisions based on their efforts. Frontrunning or behavior analyzing is essentially robbing a company of the fruits of their efforts. The market will adjust based on their buy/sell transaction, it does not need another middle man to adjust market price a millisecond sooner.

hft_throwaway 13y ago

How is it any different from arbitrage? If I see the price of ES move in Chicago before others and trade SPY in NY based on that, is it front-running? Somebody will make that trade, so we're really just arguing over who gets the money.