Having read 'Flash Boys' by Michael Lewis, this post seems like the logical followup after someone discovered the first microwave tower at the end of the book.
Didn't know that the same scam is running in Europe...
Didn't know that the same scam is running in Europe...
There are other posts by the same author which cover the same topic if you're interested.
1) How algorithmic is it? How much of the trading decision is made by a computer and how much human intervention is there.
2) How often does it trade? Some electronic trading systems can trade thousands and thousands of times a day, while others only trade a few times a quarter.
3) How long does it hold a position and/or leave a quote on the market? Some trading systems are designed to never hold positions and others hold positions constantly.
4) What latency requirements does the trade have from the time the exchange publishes data until the time an order needs to be in the market.
There are electronic trading systems that exist with variables at every end of these spectrums.
It's called front running.
Also, it isn't called front running, at least not legally. It can't be, HFT don't have any customers. Maybe Michael Lewis has a different definition of front running but for the rest of us: words have a meaning.
On the term, you're right - front running might not have been the correct therm.
I can't personally afford to have a Bloomberg feed in my living room to trade off of. Why is this any different?
I have no choice if the pension fund where I work at is investing in blue chips.
That's how I (unobjectively I concede) feel about HFT.
Imagine that Avis is buying cars in bulk and getting better deals as a result, and then imagine that the knock-on effect of them doing that is that you get better deals on cars because of how they change the way the car market works.
Car dealerships are, for obvious reasons, really fucking upset about this. And they are noisy and well-funded. Normal people start getting angry at the giant rental car companies and the unfair advantage they get, unaware of the fact that without those companies, they'd be getting screwed even worse by the dealerships.
That's what HFT does to normal investors. You don't have to take my word for it; the Chief Investment Officer at Vanguard, among many other people, has said exactly this.
Now what is the difference between sending an exchange an order for more shares than they have available and a television ad broadcasting your buying intent? In this day and age: not much.
What isn't happening: small traders, like you and I, are not sending small trades to markets and having them be "intercepted" by HFTs. HFT's wouldn't pay attention to the "guy buying one car" type of trader, and there isn't enough of a difference in the signal (your trade) and the current market price to be arbitrageable.
You will notice that the "big" players in HFT are much smaller than the people they are taking advantage of, the giant hedge funds. The HFT competitors have access to the same technology, technologists, exchange access and microwave networks. Further, they have better access to capital and legislative power, not to mention access to best selling authors.
[1] https://news.ycombinator.com/item?id=7531429
[2] http://www.chrisstucchio.com/blog/2014/fervent_defense_of_fr...
Buying extra {milli, micro}seconds to get ahead of the competition is just too new to have a general consensus on its ethical status.
(#) In the mainstream. Obviously you can find contrarians to any position.
B) Buying extra time via technology is as old as trading. If you read the article, or taken an architectural tour of the CBOT building in Chicago you will have noticed that one of its main design requirements was to house telecommunications gear.
I'm not an ethicist so I'm hesitant to speak on the ethics of market forces, but I will say:
A) How do you prevent some actors from getting information before others? Do all actors have to wait for the slowest participant? Why should we prevent it?
B) In general, faster dissemination of information leads to a more efficient market, we should encourage this, not discourage it.
HFT has been around in Europe and is as well established as the US, so I assume the alleged scam relates directly to buying and operating Microwave networks. Seriously, please do provide more information, I am keen to learn more.
disclaimer: I've not read 'Flash Boys' yet, so apologies if it's all explained in that book
EDIT: Replying to my own question: http://blogs.wsj.com/law/2014/09/08/law-firms-sue-stock-exch...
http://en.wikipedia.org/wiki/IEX
"IEX's main innovation is a 38-mile coil of optical fiber placed in front of its trading engine, which adds a round-trip delay of 700 microseconds and is believed to limit traders' ability to respond on the dark pool ahead of IEX's own pricing algorithms."
They still allow collocation, venue arbitrage, and non-human timescale trading. Any electronic trade you could do on any other dark pool you can do on IEX.
The main difference between IEX and other dark pools is that they are owned by hedge funds and they either duped or bribed a famous author to write about them.
[edit] The comment below correctly points out my insinuation about bribery and Michael Lewis is unfair and snarky. I will point out that Michael Lewis wrote a glowing book about Jim Clark a decade ago, who happens to be an investor in IEX, so there is at least the potential for intentional bias.
IEX is currently not an exchange. What they offer is a dark pool connected in series with a Smart Order Router. That's what all the big brokers (e.g., JPMorgan, Morgan Stanley, Goldman, Deutsche Bank, etc.) have been offering to their customers for years and their dark pools usually offer a lot more liquidity. The big brokers have become better and better and smart order router technology to protect their customers as much as possible from HFTs. IEX is at least 5 years late to the party.
Perhaps they are planning on becoming an exchange one day, but I am not sure how they can do that while slowing down order executions. It seems to me that that would be a serious violation of Regulation NMS.
The fact is that credible pension funds don't make their money by competing with sell-side firms. When your only job is sporadically making large block trades, you're happy to see spreads competed down as far as they can go. You don't care which market makers are winning the race to provide the cheapest possible liquidity.
Claims that buy-and-hold funds are victimized by HFT are hard to square with what Vanguard said, and with the logic of how automated trading works.
Long term investment might be a better strategy than wild speculation for a goal like that.
I have my own problems with 'Dark Pools' by Patterson, it does have some technical inaccuracy, but on the whole it paints a picture that is closer to reality and is still readable.
Trading & Exchanges by Harris is dated but will give you an introduction into market microstructure, keep in mind it was written before RegNMS.
If you want a good set of blog posts, Chris Stucchio (yummyfajitas) has an intro series that is great on his blog: http://www.chrisstucchio.com/blog/2012/hft_apology.html
It's weird that more nerds on HN haven't read it. It's a great book, and it's great in a very nerdy, systems-y way.