Comment by bostik | Hacker News Reader

Comment by bostik | Hacker News Reader

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> he posits that someone can, on a single exchange, hit a sentinel order placed by a market maker with a larger order and then have the market maker adjust the prices of orders behind the sentinel, in response to the execution [..] prior to the original order hitting the orders behind the sentinel.

"That can't happen." True, technically. But what you described earlier is close what is called the "Last Look" ability.[0] It's highly unethical, because it provides market makers and large operators a privileged data feed and ability to effectively go back in time.

Im simplified terms: if an exchange provides LL, executions against standing orders from privileged parties would be flagged as "pending" for a short window and the privileged party is sent a message of the pending execution. During the time window, they are allowed to respond with a cancel, which will be performed in front of the execution. And if a market maker knows that an execution would result in a bad trade, it will then start issuing cancels for other standing orders too.

There's also a kernel of truth in the other part I quoted. I firmly believe that market makers can't adjust prices for their standing orders, but in some exchanges there are order types called "reductions", where the market maker is allowed to adjust the available quantity of a standing order. So instead of issuing a cancel + order, the market maker can simply drop the available amount in their standing order while still keeping the order itself in the book.

0: http://www.bloomberg.com/news/articles/2015-03-03/barclays-l...

Last Look is a an issue on ForEx markets, but ForEx markets are already extremely dodgy. In many cases, your counterparty in the ForEx markets owns the exchange you are trading on. I've never encountered an equities or futures exchange that allows last look.

As for price reductions, some exchanges allow reductions, others model them as cancel + order but allow the new order to take up the priority of the old order (effectively a reduction) and still others model them as reductions, but you still lose priority (effectively a cancel and new order). That is largely immaterial though, because even if you allow reductions, if a large order hits a level it clears fully through that level before anyone can make any reductions. In fact, reductions aren't a problem, increases are because it would allow someone to sit in front of the priority queue until a level is fully cleared.

Something that did happen on some exchanges, which is closer to what you are getting at, is that on some exchanges the fill feed is less latent than the market feed. That is you would get notified that an order executed before that order was disseminated on the order book. This would allow you faster insight into the market, so people did use sentinel orders for that, but if a single order was hitting a level enough to clear it those sentinel orders wouldn't help you get out of the way on existing orders at that level, they would get filled as well. But it could be a leading indicator of multi-level sweeps. Largely that wasn't desired functionality on the exchanges side, just a by product of their architectures, but people whose job it is to understand how the exchange behaves, clearly had advantages there over those whose job is not that.

Can you guys explain what you mean by a sentinel order?

In this case, a sentinel order exploits the speed differences between different data feeds. So if an exchange sends data on executed trades out slowly, but notifies traders of their own trades in a fast way, then you place a small order so you can see market activity faster than the general activity feed.

The software engineer has a habit of imagining bow he would design a system, and then assuming the real system is built without any of the flaws he could design against.

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