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Comment by logifail | Hacker News Reader

> This is called front running and is super illegal.

Are you sure it's illegal if it's a hedge fund with access to order flow from a third party?

"Front running is one of the easiest ways to make money. It's essentially insider trading, except the inside information isn't about corporate activity; the information is about client order flow. In this case, since the index investors are not their clients, it is legal for hedge funds and any independent traders to front run them. One could argue that the hedge fund managers are doing nothing wrong; it's the investors' fault for acting irresponsibly. The problem with that argument is that many of these investors don't have a clue about what is happening to them." [0]

http://www.dark-bid.com/hedge-funds-front-running-investors....

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That article points out that "front running"(which it isn't) by HF may cost .2% a year. Its probably less than that. Bid/ask spreads are often around that percentage. This is just a trading cost. Nothing nefarious is happening here. The spread may go up if a large fund is buying, but this is only natural due to supply and demand. These HFs are just providing liquidity and "charging" a small fee for doing so. If nobody did this, trading costs would probably be even higher. There is extreme amounts of FUD about HFT and market making for some reason.

Now about the Russel indexes - the article has a point there. They are notoriously shitty indexes. Nobody should be putting money into those. But still - nothing illegal(nor should it be). This is yes, clearly a case of "investors' fault for acting irresponsibly". Nobody is forcing them to use these indexes and this information isn't hidden anywhere. Last thing we need is 100 more regulations.

> These HFs are just providing liquidity and "charging" a small fee for doing so

HF traders provide liquidity and market-making when it suits them. Doesn't that stop when it doesn't?

Yes. But liquidity some of the time is better than liquidity none of the time. It ain't a perfect world.

People rarely do something that doesn't suite them:) What is the point?

This hangs on an assumption that people are rational, they are not.

Arguments for or against HFT aside, the optics around HFT are pretty bad. Hedge funds getting rich investing millions in faster ways to trade isn't going to play well.

Funnily enough I've been involved in this argument a number of times on this forum. Front Running is not illegal, order flow can be purchased, and even institutional investors are unable to buy portions of millions of stock in one go. You can theoretically front-run part of that order if your algorithms analysing orders think that a big order is following current ones. People will argue front running is illegal because the first few results on google have misconstrued the idea with insider trading but if you dive into some financial books you'll find as a concept it's legal, but there are illegal ways of doing it.

edit: found the article quoted last time I discussed this.

https://blogs.cfainstitute.org/investor/2013/04/24/what-to-d...

Larry Harris, Professor of Finance as USC;LA says

"A few high-frequency traders front-run buy-side traders who are working orders, thereby making the latter’s trades more expensive. Such activities are legal if the high-frequency traders do not improperly obtain information about the orders they front-run."

This isn't classic front running. It's price action prediction based on observed action.

Yes. Acting upon material, non-public information, is the very definition of insider trading. It does not matter where the information originates.

It's only profitable if you dont get caught. SEC will make a very expensive and public example if they catch you.

Source: +15 years in the industry, a number of which have been spent working in/with compliance.

But you can front-run using public information. Large orders are broken up and with sufficient analysis and prediction you can front-run a portion of them.

If you're a market maker or broker, it is illegal for you or any part of your firm that you have informed to front run client orders, plain and simple.

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