4 ms·

The big problem is that the human definition of "front running" is bigger and more complex than the strict one that the computers (probably) obey. To the compu

The big problem is that the human definition of "front running" is bigger and more complex than the strict one that the computers (probably) obey. To the computers the milliseconds of lag between the orders arriving at one exchange and the other is an eternity, it's plenty of time for the information to propagate and make price changes happen. As far as the computers are concerned the whole counterparty/market maker exchange above happened in totality at one exchange before it got anywhere close to the next exchange. But to the human beings which by definition operate at human time scales it's seems as though the counterparty says "buy 2 million" and at that exact instant someone else cuts in line, yells "buy 2 million" and gets his execution price and causes the market maker to up the price that he has to pay. I realize that TECHNICALLY that's not what happens. But to a human being it can easily seem that way. That's why the HFT folks argue so vociferously -- they're technically right -- but it makes them look like giant assholes to everyone else. It doesn't matter if they're technically correct, it's indistinguishable from "we're all smarter than you and you just need to trust us on this one" which people don't have a strong affinity for. Here's that idea fleshed out: COUNTERPARTY: "2 million Tesla?" MARKET MAKER: "209 at 210." COUNTERPARTY: "Buy.." HFT: "BUY 2 MILLION TESLA!!!" COUNTERPARTY: "...2 million Tesla for 209." MARKET MAKER: "Sorry bud, now it's 210 at 211" COUNTERPARTY: "WTF?!" I realize that's not ACTUALLY what's happening. But when the time-scales of human beings and computers are so incredibly different it's not hard to understand why people FEEL like it is.

JumpCrisscross 13y ago
> I realize that's not ACTUALLY what's happening. But when the time-scales of human beings and computers are so incredibly different it's not hard to understand why people FEEL like it is. The guy getting screwed by HFT isn't the chap looking to sell 2 million Tesla at 209. It's the guy on the other side who was hoping to pick up 2 million Tesla for 209 (to flip it at 211). Now the HFT buys it for 209 and sells it at 210, compressing the margin the flipper would have earned from $2 to $1. That's not front-running - that's competition. There is no privileged relationship between the HFT market maker and the other market makers or brokers looking to buy stock. In fact, there is an adversarial relationship. That adversarial relationship is what allowed the original chap to offload his 2 million Tesla at 209 in an instant. It is also what allowed the next guy to buy it for 210, versus the 211 the other market maker wanted to flip it to him for.
- msandford 13y ago
  I think you mis-read what I wrote. Nowhere do I mention a guy actively wanting to sell 2 million at 209 (the market maker was willing to, but didn't necessarily desire to) nor do I mention a guy (an actual human being, not HFT) who was in fact able to buy it for 210 because neither of those happened. Furthermore there is no such thing as an HFT market maker (at least that I'm aware of) because the definition of a market maker is someone who has to provide liquidity continuously. The HFTs all go offline when things get dicey ergo they're not market makers. What I described is how it SEEMS to a lay-person and how it SEEMS like HFTs are jumping the line. A human being can't want to buy or sell stocks much faster than the blink of an eye, which is about 80ms. So everything that happens faster than that, or the click of a key (which might be 100 or 200ms) is going to SEEM like some serious bullshit. Technically it might not be but the entire world isn't going to get educated about HFT to make "smart" decisions.
  - harryh 13y ago
    I totally agree with you about the SEEMS. But that's exactly why the Michael Lewis book is so frustrating. He's a paid professional who should be able to see through the SEEMS to get to what is actually happening. He's also a talented and popular enough writer that he probably could have done a lot to help explain to the world what's really going on here. But instead he took the lazy route and just played into everyone's fears so he could make another 5 million (or whatever) on his latest book. It's so lame.
    - msandford 13y ago
      This is all a matter of perspective. Some people think that markets exist and whatever happens, happens. It seems to me that a lot of the HFT folks fall into that category. Others say "the stock market is supposed to exist so that large companies can raise funds for growth" The market isn't a thing that exists unto itself, it's a thing that humans created for human purposes. If something is happening in that market, due to a particular set of incentives that causes human beings (which are the only reason said market exists) to feel that sub-optimal outcomes are happening, well then the rules can be changed. The market exists to serve humans and if humans aren't being served they can change it. So once you have a market structure that exists on smaller time scales than human beings are capable of comprehending everything about "what's really going on here" goes right out the window. To human beings water is essential for life and largely speaking pretty harmless. But to flies water is hugely dangerous. Surface tension is a joke to a human being but it is much stronger than most insects. That's why so many insects have proboscis. http://irl.cs.ucla.edu/papers/right-size.html http://irl.cs.ucla.edu/papers/right-size.html What we have here is one side trying to argue the technical side of things and being 100% correct. Technically their arguments are quite good. The other side is arguing philosophically and their arguments are good as well. The question then becomes, which is more important? Professionals involved in finance are split on the tradeoffs. It should not be surprising that those not professionally involved in finance don't care to learn why a non-intuitive outcome is better than an intuitive one.

JumpCrisscross 13y ago

> I realize that's not ACTUALLY what's happening. But when the time-scales of human beings and computers are so incredibly different it's not hard to understand why people FEEL like it is. The guy getting screwed by HFT isn't the chap looking to sell 2 million Tesla at 209. It's the guy on the other side who was hoping to pick up 2 million Tesla for 209 (to flip it at 211). Now the HFT buys it for 209 and sells it at 210, compressing the margin the flipper would have earned from $2 to $1. That's not front-running - that's competition. There is no privileged relationship between the HFT market maker and the other market makers or brokers looking to buy stock. In fact, there is an adversarial relationship. That adversarial relationship is what allowed the original chap to offload his 2 million Tesla at 209 in an instant. It is also what allowed the next guy to buy it for 210, versus the 211 the other market maker wanted to flip it to him for.

msandford 13y ago
I think you mis-read what I wrote. Nowhere do I mention a guy actively wanting to sell 2 million at 209 (the market maker was willing to, but didn't necessarily desire to) nor do I mention a guy (an actual human being, not HFT) who was in fact able to buy it for 210 because neither of those happened. Furthermore there is no such thing as an HFT market maker (at least that I'm aware of) because the definition of a market maker is someone who has to provide liquidity continuously. The HFTs all go offline when things get dicey ergo they're not market makers. What I described is how it SEEMS to a lay-person and how it SEEMS like HFTs are jumping the line. A human being can't want to buy or sell stocks much faster than the blink of an eye, which is about 80ms. So everything that happens faster than that, or the click of a key (which might be 100 or 200ms) is going to SEEM like some serious bullshit. Technically it might not be but the entire world isn't going to get educated about HFT to make "smart" decisions.
- harryh 13y ago
  I totally agree with you about the SEEMS. But that's exactly why the Michael Lewis book is so frustrating. He's a paid professional who should be able to see through the SEEMS to get to what is actually happening. He's also a talented and popular enough writer that he probably could have done a lot to help explain to the world what's really going on here. But instead he took the lazy route and just played into everyone's fears so he could make another 5 million (or whatever) on his latest book. It's so lame.
  - msandford 13y ago
    This is all a matter of perspective. Some people think that markets exist and whatever happens, happens. It seems to me that a lot of the HFT folks fall into that category. Others say "the stock market is supposed to exist so that large companies can raise funds for growth" The market isn't a thing that exists unto itself, it's a thing that humans created for human purposes. If something is happening in that market, due to a particular set of incentives that causes human beings (which are the only reason said market exists) to feel that sub-optimal outcomes are happening, well then the rules can be changed. The market exists to serve humans and if humans aren't being served they can change it. So once you have a market structure that exists on smaller time scales than human beings are capable of comprehending everything about "what's really going on here" goes right out the window. To human beings water is essential for life and largely speaking pretty harmless. But to flies water is hugely dangerous. Surface tension is a joke to a human being but it is much stronger than most insects. That's why so many insects have proboscis. http://irl.cs.ucla.edu/papers/right-size.html http://irl.cs.ucla.edu/papers/right-size.html What we have here is one side trying to argue the technical side of things and being 100% correct. Technically their arguments are quite good. The other side is arguing philosophically and their arguments are good as well. The question then becomes, which is more important? Professionals involved in finance are split on the tradeoffs. It should not be surprising that those not professionally involved in finance don't care to learn why a non-intuitive outcome is better than an intuitive one.