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What some HFT traders are doing is economically equivalent to front-running, but is not legally front running since they are not front running the orders of the

What some HFT traders are doing is economically equivalent to front-running, but is not legally front running since they are not front running the orders of their own clients. All of this is explained in the article, so if you disagree, it would make more sense to read it, find the parts you disagree with, and argue against them, rather than skim the article and then argue with our collective rehashing of the article's argument.

deleted 11y ago
[deleted]
mrchicity 11y ago
That's a huge difference though. A broker owes a duty to his client not to screw him over. He's supposed to be helping the client. A prop trader has no duty to others in the market. He's their adversary. They're both competing to buy underpriced shares and sell overpriced ones.
- JesperRavn 11y ago
  For the purposes of this discussion, it's not a difference at all. The question is not what should be legal or not, but what customers would prefer, and what makes a better market. If you ask a customer "would you like an exchange that gives people enough information to front run your order" or "would you like a broker who front runs your order" the answer in both cases would be a resounding no. The claim in the article is that you can create a better exchange by providing an equal footing for all participants.
  - mrchicity 11y ago
    Everybody wants to trade with no price impact. If you asked me if anyone else should be allowed to colocate their servers, I'd say no, just give me a monopoly please. One participant's desires don't make a good market. Fair and non-discriminatory access to exchanges (not free, but anybody can pay to compete if they wish), fast trading engines and deep order book information are what let traders put up such tight spreads for customers in the first place. Vigorous competition between all market participants keeps prices fair.
    - JesperRavn 11y ago
      EDIT: I think you are right, although I would express things a bit differently. I'm writing a top level post with my thoughts. ORIGINAL POST: When you make a trade, there are some information rents associated with that trade. If someone knew you were about to trade, they could capture all of those rents. When there is a monopoly on exploiting these information rents (as in frontrunning), they will be captured by the frontrunner. When there is perfect competition (as when a number of HFTs can trade in another exchange before your trade reaches it), these rents will be all wasted on technology to maximize speed, i.e. no one gets them, they become deadweight loss. I understand that there are other issues, such as knowing whether a trade comes from a single seller or multiple smaller sellers. But this is a separate issue from simply trading ahead of other people. I don't understand why it's so controversial that an exchange would advertise the fact that traders can rely on their orders reaching the exchange before anyone else knows about it as a good thing.
      - mrchicity 11y ago
        The original trader still has the ability to capture his information rents in a single trade on one market. Nobody can see it and step away or react before the execution goes through. That's all anyone is guaranteed. HFTs face the same problem. If they're trying to cross the spread to put on a trade or hedge, they also have market impact costs and slippage. I think it's controversial because a lot of their marketing implies all HFTs do this as their primary business and thus add very little value. It creates this narrative of a parasitic activity that intermediates trades which would have already occurred where no risk is taken. I don't think that's the case in reality. All HFT strategies are looking at order books in the products they trade, and they definitely make money (or avoid losses) when someone executes inefficiently across exchanges, but there's more to it than that. HFTs are very successful in futures and non-US markets where products trade on a single exchange. How do they do that if they aren't good at predicting prices and taking risk?
        JesperRavn 11y ago
        >The original trader still has the ability to capture his information rents in a single trade on one market... That's all anyone is guaranteed Yes this is the essence of it. Based on other posts, I would guess that if you really wanted to make simultaneous trades in multiple markets, then you could. But even if HFT really did render this impossible, it's not a bad thing, since it trading in two exchanges simultaneously actually gives more rents to the large trader than the theoretical ideal of a single continuous double auction. And if you want to trade in A then trade in B based on the results of A, then you certainly don't deserve to be the first to make it to B.
kasey_junk 11y ago
The problem is that front running requires 2 things: - the ability to see orders ahead of someone, which this article implies you can, but you can't. - the fiduciary duty not to use someone's intent to trade against them. HFT traders do not fall into either camp. They can't see your order before it goes to an exchange and they don't have a duty not to change their prices on one exchange in reaction to price moves on other exchanges.
- JesperRavn 11y ago
  The article claims that by colocating in one exchange, HFT can see you order arrive at exchange A, and send orders to exchange B before your order reaches exchange B. I don't know if this is true, but this is the most important part of the article. Given the fixed latency they introduce, you can send your trades to IEX before sending to any other exchange, safe in the knowledge that no other exchange will react to that information before your order. No one is talking about the fiduciary duty. Fiduciary duty is just a way to define a default contract into law. E.g. brokers could write a contract saying that they promise not to front run. But since this is something that almost every client would want, it's just written into law instead.
  - kasey_junk 11y ago
    There is a major caveat to what they are reporting that gets to the heart of this. HFT can't see your order as it arrives on exchange A before it arrives on exchange B, they can see the results of an order. That is, they can see a large trade happened on price X on A. With that information they may want to change their prices on exchange B and they may be able to do that before you can also place an order on B. There are lots of ways to mitigate this other than using a dark pool like IEX. All the exchanges offer exotic order types to make this easier for instance, and large block traders have for years had execution algorithms that spread their orders around venues and over time to minimize price impact. That IEX offers another option for large block traders does not bother me at all, that they market it via underhanded moralizing i find distasteful. Finally, in this context front-running has a specific meaning and it requires a fiduciary duty for it to be front running. By using that term incorrectly you ARE bringing fiduciary duty into the conversation, whether you want to or not.

deleted 11y ago

[deleted]

mrchicity 11y ago

That's a huge difference though. A broker owes a duty to his client not to screw him over. He's supposed to be helping the client. A prop trader has no duty to others in the market. He's their adversary. They're both competing to buy underpriced shares and sell overpriced ones.

JesperRavn 11y ago
For the purposes of this discussion, it's not a difference at all. The question is not what should be legal or not, but what customers would prefer, and what makes a better market. If you ask a customer "would you like an exchange that gives people enough information to front run your order" or "would you like a broker who front runs your order" the answer in both cases would be a resounding no. The claim in the article is that you can create a better exchange by providing an equal footing for all participants.
- mrchicity 11y ago
  Everybody wants to trade with no price impact. If you asked me if anyone else should be allowed to colocate their servers, I'd say no, just give me a monopoly please. One participant's desires don't make a good market. Fair and non-discriminatory access to exchanges (not free, but anybody can pay to compete if they wish), fast trading engines and deep order book information are what let traders put up such tight spreads for customers in the first place. Vigorous competition between all market participants keeps prices fair.
  - JesperRavn 11y ago
    EDIT: I think you are right, although I would express things a bit differently. I'm writing a top level post with my thoughts. ORIGINAL POST: When you make a trade, there are some information rents associated with that trade. If someone knew you were about to trade, they could capture all of those rents. When there is a monopoly on exploiting these information rents (as in frontrunning), they will be captured by the frontrunner. When there is perfect competition (as when a number of HFTs can trade in another exchange before your trade reaches it), these rents will be all wasted on technology to maximize speed, i.e. no one gets them, they become deadweight loss. I understand that there are other issues, such as knowing whether a trade comes from a single seller or multiple smaller sellers. But this is a separate issue from simply trading ahead of other people. I don't understand why it's so controversial that an exchange would advertise the fact that traders can rely on their orders reaching the exchange before anyone else knows about it as a good thing.
    - mrchicity 11y ago
      The original trader still has the ability to capture his information rents in a single trade on one market. Nobody can see it and step away or react before the execution goes through. That's all anyone is guaranteed. HFTs face the same problem. If they're trying to cross the spread to put on a trade or hedge, they also have market impact costs and slippage. I think it's controversial because a lot of their marketing implies all HFTs do this as their primary business and thus add very little value. It creates this narrative of a parasitic activity that intermediates trades which would have already occurred where no risk is taken. I don't think that's the case in reality. All HFT strategies are looking at order books in the products they trade, and they definitely make money (or avoid losses) when someone executes inefficiently across exchanges, but there's more to it than that. HFTs are very successful in futures and non-US markets where products trade on a single exchange. How do they do that if they aren't good at predicting prices and taking risk?
      - JesperRavn 11y ago
        >The original trader still has the ability to capture his information rents in a single trade on one market... That's all anyone is guaranteed Yes this is the essence of it. Based on other posts, I would guess that if you really wanted to make simultaneous trades in multiple markets, then you could. But even if HFT really did render this impossible, it's not a bad thing, since it trading in two exchanges simultaneously actually gives more rents to the large trader than the theoretical ideal of a single continuous double auction. And if you want to trade in A then trade in B based on the results of A, then you certainly don't deserve to be the first to make it to B.

kasey_junk 11y ago

The problem is that front running requires 2 things: - the ability to see orders ahead of someone, which this article implies you can, but you can't. - the fiduciary duty not to use someone's intent to trade against them. HFT traders do not fall into either camp. They can't see your order before it goes to an exchange and they don't have a duty not to change their prices on one exchange in reaction to price moves on other exchanges.

JesperRavn 11y ago
The article claims that by colocating in one exchange, HFT can see you order arrive at exchange A, and send orders to exchange B before your order reaches exchange B. I don't know if this is true, but this is the most important part of the article. Given the fixed latency they introduce, you can send your trades to IEX before sending to any other exchange, safe in the knowledge that no other exchange will react to that information before your order. No one is talking about the fiduciary duty. Fiduciary duty is just a way to define a default contract into law. E.g. brokers could write a contract saying that they promise not to front run. But since this is something that almost every client would want, it's just written into law instead.
- kasey_junk 11y ago
  There is a major caveat to what they are reporting that gets to the heart of this. HFT can't see your order as it arrives on exchange A before it arrives on exchange B, they can see the results of an order. That is, they can see a large trade happened on price X on A. With that information they may want to change their prices on exchange B and they may be able to do that before you can also place an order on B. There are lots of ways to mitigate this other than using a dark pool like IEX. All the exchanges offer exotic order types to make this easier for instance, and large block traders have for years had execution algorithms that spread their orders around venues and over time to minimize price impact. That IEX offers another option for large block traders does not bother me at all, that they market it via underhanded moralizing i find distasteful. Finally, in this context front-running has a specific meaning and it requires a fiduciary duty for it to be front running. By using that term incorrectly you ARE bringing fiduciary duty into the conversation, whether you want to or not.