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Comment by mst | Hacker News Reader

So, in theory, you get perfectly timed execution.

This assumes you're willing to trust their software and hardware.

I suspect they're right that this is a far more effective and comprehensive approach than IEX.

I think IEX is going to nail them to the wall because their target market understands and trusts a giant ball of cables having a particular length, but can achieve neither when faced with a giant ball of computer science.

Other than the first sentence, this comment was about potential customer response; I don't have an educated opinion about how trustworthy and/or effective any given exchange software is.

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They don't care about "target markets" or what anyone else thinks. This technology is to protect their own trades.

The goal is to be able to execute buys across multiple exchanges (because the orders are so large) without other high frequency firms being able to see a trade on one exchange, then buy and resell stock to them at a higher price on another exchange.

> without other high frequency firms being able to see a trade on one exchange, then buy and resell stock to them at a higher price on another exchange

This is a pretty common misconception of how latency arbitrage works. In reality the other HFT are not buying/selling new orders. Instead what they are doing is cancelling or modifying their existing orders so that they don't get hit by incoming orders.

HFT firms can have orders that have been resting for a very long time (days/weeks depending on the exchanges/risk rules) and you will never be able to get an order now in front of an order from last week, no matter how fast you are.

Great clarification. HFTs have short holding times for securities, but they're not typically in and out of trades in a handful of microseconds.

That 100% depends on the exchange actually. Not all exchanges have priority rules like that. It certainly is the case for a lot of futures markets, but definitely not for many places for Equities, Options, or even FX.

Which major equities exchanges don't do price/time priority?

Can't really say sadly, but it is true. But it is normally the case for Limits, except not all orders are limit orders. You're right mostly, for a certain type of strategy, but not all of them. Ironically I just looked up your profile and on the link you mention Flash Boys: Not So Fast.

I used to work with Peter Kovac, that book's author, at Madison Tyler Technology / EWT LLC (which is now Virtu Financial). He's one of the smartest guys I've ever met and that was a pretty decent book.

Its been awhile since I perused order type documentation so anything is possible, but I don't ever remember seeing an order type that can jump a resting limit order from the past on any any exchange I've looked at.

I have seen odd priority rules around how orders get around sweep or self match protections and the like, but not jumping a resting, visible order.

Given the order type doco is public for SEC regulated exchanges I doubt your IP agreement restricts you from slipping me a link right? ;)

ISO limits that create a new price are usually given better priority than Hide-not-slide orders entered with the equivalent working price, even if they were accepted before the ISO limit. Depends on the exchange obviously.

Sure and the non-visible parts of icebergs end up getting later priority than new limits at the same level. I'm not arguing that there aren't order types you can do that will put you at the back of the line priority wise, I'm suggesting the alternative.

If I put a vanilla limit at a level and don't cancel it (and its GTC) today, I've never seen an order type that would allow someone to jump me in the priority queue tomorrow.

Wouldn't this strategy work?

See big sell order at getting executed at $10.30, $10.20, $10.10 at Exchange A. Short sell at $10.30 on Exchange B. When the big order comes, rebuy at $10.20.

How do you get to the front of the line at either the $10.30 or $10.20 positions?

You are correct, I oversimplified my example.

"In reality the other HFT are not buying/selling new orders. Instead what they are doing is cancelling or modifying their existing orders so that they don't get hit by incoming orders."

Right. One of the strategies is:

- Put in standing order to sell a small amount of security slightly below market and leave it active.

- Wait until a buy order triggers it.

- Buy same security faster than rest of buy order can be processed.

- Sell security just bought at higher price.

- Profit.

There are lots of variations on this, but that's the basic idea. It has the profitability of front-running, but is legal.

You haven't even described a strategy. Guess what, I made a bunch of money off brexit by buying low and selling high!

Consider the alternative way this "strategy" can go:

- Put in a standing order to sell a small amount slightly below market.

- Wait until you receive a "TRADE CONFIRMATION 100@$10" message.

- Buy a lot of same security very fast and put in a sell order at higher price.

- No one actually buys it.

- Loss

This is actually a very risky strategy and very few people do it.

What's actually happening most of the time is a far less risky one:

- Put in standing order SELL 100@$10, 100@$10.05, 100@$10.10

- When you receive TRADE CONFIRMAtiON @ $10, cancel other orders and reprice higher (maybe $10.20 and $10.30).

- Maybe put prices back if you don't get filled in an hour.

The goal here is to offer a good price $10.00 to Joe Sixpack (no delta toxicity), but to offer a worse price to Bill Ackman (high delta toxicity).

This strategy could work, but only on exchanges where your own private trade confirmations are faster than the public quote broadcasts, and only if you can use the information to aggressively trade a different, but highly correlated security.

> Buy same security faster than rest of buy order can be processed.

How? You can't because your competition is already resting orders there (from potentially weeks ago) and any order you put in there will be behind your competitors no matter how fast you are.

What does happen is that you all are resting orders up and down the order book. When a big order takes out several levels of your orders, you race as fast as possible to cancel those same levels at other exchanges. If you are faster than the big order you only get hit for a single exchange.

Its a risk mitigation technique, to keep your profits from your regular business of making the spread, not risk free profit.

So one place firms are racing is on the cancel side. The other is on filling back in orders after the big order has cleared levels. The faster you are there the better priority your resting orders will have (potentially weeks from now).

Would eliminating the sub-penny rule remove the need to use this strategy? If there were basically an infinite number of points orders could be resting, you could just get in an epsilon above or below some other fund's order to get ahead in the queue?

Chris Stucchio ('yummyfajitas) has argued precisely that. I tend to agree with him but can't say for sure.

Ha, I even linked to his blog where I got that idea from in another post.

Exactly. This is a defensive technology to defend against other HFT players.

Think of it this way:

- In the past (prior to HFT), when you put in an order, you know where the market is going to be. How you win is by building better financial models to identify which security to buy/sell.

- With HFT, traders, without sophisticated tools, can no longer trust the market because once they submit, HFT algorithms can shift the market. The focus now is to build a better HFT product to win in the marketplace.

- What Renaissance is doing here is neutralizing the effect of the HFT on their trades. Once they neutralize the "enemy", they can go back to doing what they are great at: financial modeling.

Throughout history, power has shifted with changes in weapon technology. This is just a shift of power back to traditional fund managers from HFTs.

How did you know in the past where the market was going to be?

All that was ever available was information about past trades, and perhaps open orders in the market that could have already been removed at any time?

Sorry, I could have phrased it better.

When I said "where the market is going to be" I meant that from one second to the next, you knew it wouldn't move that far.

In the past, when you called up your broker to buy a stock, he could give you a quote (say 12.35) and you tell him to buy, you know that the price will be the quoted amount. (Market in finance lingo in this case means current price of the stock)

If you need to sell a large batch of stock, you know the broker can sell it to multiple people and get you the best price.

With HFT, trades are moving so much faster and you can get a quote from the exchange (someone want to buy 500 shares @ 12.35) and by the time your trade gets sent from your computer to the exchange, that offer is now 400 shares at $12.50. The market has moved in milliseconds. In other words, you cannot trust the market (current price) because you don't know where it will be in the milliseconds from viewing the quote to entering the trade.

In Flash Boys, they talked about ghosts in the machines. This is what they were referring to. When they entered their trades, it's as if the market knew beforehand and moved against you.

(For finance savvy people, apologies, I've simplified it in lieu of understanding)

The reason that the market wouldn't move that far is that the market makers were quoting a much bigger spread. That is the price was always way worse (a quarter at the minimum).

You can still get that pricing level almost everywhere by quoting through the market at that price difference.

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