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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 excha

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.
lucozade 11y ago
Frontrunning is a crime because it's acting on privileged information. It's in the same boat as insider dealing. They have that privileged info because of their fiduciary relationship so it is relevant. What the HFT guys are doing is not frontrunning because anyone can get hold of the same information they have (for a price). That information is not privileged (assuming deep pockets != privilege) so it's not frontrunning. They're getting to the trade first because they're technically quicker than the routers the banks are using.

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.

lucozade 11y ago

Frontrunning is a crime because it's acting on privileged information. It's in the same boat as insider dealing. They have that privileged info because of their fiduciary relationship so it is relevant. What the HFT guys are doing is not frontrunning because anyone can get hold of the same information they have (for a price). That information is not privileged (assuming deep pockets != privilege) so it's not frontrunning. They're getting to the trade first because they're technically quicker than the routers the banks are using.