Those types of hft firms are surely eating into Renaissance's profits in a big way.
What you are describing isn't front running (or even illegal).
It certainly seems to me that they are running out in front of the order. I'm not sure how exactly you might be contorting the meaning of 'front running' for this not to apply.
But it is a lost battle anyway.
You're discussing trading in response to an executed order, which you have as a member of the general public.
If that's front running, then what isn't? Is my purchasing wheat futures in response to news of an predicted drought "front running" the orders that bakeries will be making?
If a firm is able to consistently get to all the other exchanges first, they can shave pennies off of a large percent of orders. That's a pretty big downside for everyone that trades.
They get accurate prices to the market faster, but only by a millisecond or so. That's a miniscule upside.
How is the bad not a thousand times the good?
Except for those who have their pensions stored in Renaissance's own pension fund, hah!
(And places like Germany only recently tightened laws against it.)
1) speeds up price discovery 2) makes complying with regulation cheaper 3) it is nearly impossible to enforce currently
Some op-ed pieces arguing for it.
http://www.marketwatch.com/story/why-insider-trading-should-...
http://www.forbes.com/sites/jeffreydorfman/2015/03/22/a-mode...
https://www.washingtonpost.com/news/wonk/wp/2013/07/26/insid...
I am on the fence myself, not having thought about the matter too much. Instinctively, I'd say insider trading should be handled as a breach of contract (ie if I trade on something that I signed an NDA for), not as a criminal matter.
It's impossible because the HFT will only know your order has reached exchange A after exchange A has told him about it. Obviously A can't tell him about it until after your order has arrived.
Front running is a strategy where your broker sees your order, trades ahead of it, and then routes your order to the market. It's highly illegal.
"Buying ahead of you" requires some kind of advance knowledge, and in the scenario described you simply don't have it.
I don't really know if that is the case (or ever was).
In any event, it's not acausal.
Suppose there is a pattern of 10% of traders being sloppy, and 90% being not sloppy. If you run this strategy, you lose 90% of the time.
Additionally, whenever a small trader comes along, you are again overreacting. I.e., I make quite a few (automated) trades. I never cross exchanges or blow up more than 1 level. Whenever I trade you are again buying all the shares and probably losing money.
What I described as acausal is responding to an order at BATS before it gets there. Guessing that maybe an order might go to BATS because you saw one at ARCA isn't acausal.
Example:
Vanguard sends a buy order of 1000 shares of AAPL to exchange A. Some HFT firm sees that order on exchange A and knows that it will also be placed on exchange B, and was surely broadcast from Vanguard's trading floor at the exact same moment as the order to exchange A.
However, the HFT firm also knows that Vanguard is physically closer to exchange A then B, and the HFT firm has invested a lot of money to ensure that they have the physically shortest possible route from themselves to exchange B.
This allows them to broadcast their order to exchange B and have it arrive there before the order broadcast by Vanguard, even though they broadcast their order later.
It is somewhat difficult to wrap your head around, but it is a physical reality, and people are making millions of dollars from it as I write this.
B) he is reacting specifically to the term front-running which has a known technical definition in trading and cannot happen the way you describe (I've said elsewhere I believe the term has been appropriated and redefined and am not willing to fight that anymore, maybe he is).
C) it's funny that you mention Vanguard as they have been pretty adamant that HFT market makers of the form that use latency are save them money.
TRADE AAPL 1000@$96.98.
He does not see "Vanguard" - the trade confirmation is anonymous. It could even be him! (Yes, you are subscribed to a multicast trade confirmation feed and even your own trade confirmations are anonymized.) He does not see Vanguard's physical location - for all he knows Vanguard is closer than he is.
So actually, all the HFT knows is that someone bought some AAPL.
Now what? Whenever someone buys AAPL he goes out and buys a bunch more? That doesn't sound like a moneymaking strategy to me.
What evidence do you have that people are making millions of dollars from this as you write this? Michael Lewis?
Especially since for every seller there's also a buyer.
You've entered no such agreement with other market participants.
The behaviour your discussing does not involve any fiduciary responsibilities.
> This behavior, however, is identical to it in spirit and moral character.
That seems self-evidently false, but okay, I'll bite: What moral precept is being violated here, and why is it "identical" to the fairly serious sin of someone with a fiduciary responsibility to you violating your trust?
Let's play fill in the blanks: "Goldman Sachs wants to buy $400m stock in Apple, but after they buy $20m, a member of the public sees the strange pattern of executed orders, guesses that someone is buying a lot of Apple stock, and starts buying up stock too. This is highly immoral, because members of the public have a ______ duty to ______, and not allowing Goldman Sachs to manipulate the market in peace violates it."
What phrases can we put in the blanks that makes that not nonsense? I'm pretty sure it's not a fiduciary duty, and it seems quite clear it's not to Goldman. What duty is it, and to whom is it owed?
Admittedly I have zero special knowledge of Renaissance and what particular strategies they use.
Renaissance is using satellites to monitor retail store foot traffic to predict quarterly earnings.
(both as hypothetical examples)
But I'm no longer willing to fight the front-running term fight anymore. It will just have to be like my fight against the mainstream use of hacker.
Just like people will call things "insider trading" when there is trading based on insider information, whether or not it happened to be legal.
The reason front running is illegal is because it is a violation of a fiduciary duty. Third parties do not have a fiduciary duty, therefore it's not illegal. "It's front running, but without the violation of the fiduciary duty" is like "murder, but without the killing someone", or "fraud, but without the deception".
> What would you rather have them call it? They can't call it nothing.
Not everything needs a name. Since what you seem to be describing is "reacting to the public actions of other market participants", does it need a name?
Alternatively, if you think something serious is going on, why don't you define it, and then we can name it?
And nobody is calling this kind of "front running" illegal.
> like "murder, but without the killing someone", or "fraud, but without the deception".
In a murder analogy, you'd keep the killing but change something else, maybe it's properly manslaughter but people will still call you a murderer.
For "fraud without deception", let's look at what that entails. You lie. The victim knows you're lying, no deception involved, but they rely on your word. The victim is harmed. I think that's close enough to allow people to call it fraud, even if legally it's slightly different.
> "reacting to the public actions of other market participants"
The reason people dislike it is because it's not just 'reacting'. They're getting in their own action before the thing they're reacting to has finished.
> why don't you define it
Darawk defined this version for us. "front-running. Which is me seeing your order on exchange A and buying ahead of you on exchange B before your order arrives."
Seeing a completed order on exchange A, and speculatively purchasing stock on B in the hopes that the buyer might later buy stock on B sure sound reactive to me.
(And it's not might when there are rules about doing things on multiple exchanges. But I'm not an expert on that part.)
So your argument is...what?
Hypothetically: Let's say I have an inventory of stock A, which I think is worth X, and which try and sell whenever the market price climbs above X. Now there's some new public knowledge that materially impacts my estimation of the value of that stock (eg, a large hedge fund has started buying large blocks of this stock): I no longer think it's worth X, but actually Y, and I'd like to stop selling it whenever the price climbs above X, and instead wait until the price climbs above Y.
So you're saying that's okay, and I can price my inventory however I want, but only if I give the hedge fund a chance to buy a bunch of underpriced stock first? This raises some questions such as:
1) Why on earth is that a good rule?
2) How much time do I need to give the hedge fund? Do they only need a few seconds? Should they get a day? A week? At what point am I allowed to change the price I'm selling stock A for without it "interrupting" the hedge fund? Do they need to announce that they're done, or is their a timeout period after which I can just assume? Can I change the price I charge other people if I still let the hedge fund buy at the old price, or does everyone get the discount?
3) Or is it not about time, but about amount? Does the hedge fund have some divine right to buy as much stock as they want without it driving the price up? Why? And how come nobody else has that right? Do you have to be a hedge fund to get the right to name your own price, or do normal people get to do that too?
4) Or is it somehow okay if I'm selling, but not buying? Is it's okay for me to raise the price I'm willing to sell stock A for if I find out a hedge fund is investing, but not okay for me to raise the price I'm willing to buy stock A for? What happens if I find out a hedge fund is liquidating their position instead? Do I get to lower the price I'm willing to buy and sell it for, or just one of them? There's no laws or SEC regs about this; is there a list of rules somewhere? Is it in the bible?
5) Does this only count market actions? If the hedge fund gives a Bill Ackman style press release about how some company is terrible and should be prosecuted, can I change my prices immediately, or do I need to wait in case I'm interrupting some hedge fund strategy? I mean, maybe they were planning on giving the press conference and then buying a bunch of stock; if I think their arguments are bollocks and I buy a bunch first, is that interrupting them?
And so on. The entire argument seem awfully focused on why large hedge funds and investment banks should be able to ignore basic market rules. I'm sure they'd like to; I'm still waiting to hear why they should. (One of my favourite scenes for Lewis's Flash Boys was when a trader expresses outrage that his very large order in a thinly traded stock caused the price to move against him. How terrible; if only there was a law that required people to trade with him at the price he chose...)
Can you not see how it's bad in the specific case where they already issued the order to all exchanges but your order gets processed first because you used a different cable? Ignore the more ambiguous cases for the moment.
Why is protecting the interests of hedge funds and investment banks important enough it needs a special rule? This isn't a rule that will benefit the little guy; it strictly benefits the biggest fish.
> Can you not see how it's bad in the specific case where they already issued the order to all exchanges but your order gets processed first because you used a different cable?
To be clear, your concern is strictly that if a hedge fund is buying a very large amount of stock, this will cause the price to move against them as people react to it, and you think they should get a full half second (an eternity at the speed of the modern market) to buy as much as they want before people are legally allowed to react?
That sounds like a terrible idea, and in the specific case you list: No, I don't see why that's bad. I don't see why anyone except a large hedge fund or investment bank would.
Further: Once the order hits the market, you're saying there should be a half second window during which no one can do anything except the hedge fund. But as soon as that half second window closes, there will be a race to (finally) react. Which will be won by...the HFT firms, right? Won't they be able to, hypothetically, get their rSo even if we accept your premise, isn't this just shifting the victims around without fixing anything?
> To be clear, your concern is strictly that if a hedge fund is buying a very large amount of stock, this will cause the price to move against them as people react to it,
> in the specific case you list: No, I don't see why that's bad.
The original scenario has nothing to do with order size. The scenario is that X sends a simultaneous order to multiple exchanges, but while it's still in transit to most of the exchanges Y reacts to the order and submits their own on a faster cable, getting there before the order they're reacting to. I think such an outcome is clearly bad. I won't suggest a fix to avoid distraction. Do you disagree with it being bad? Picture it happening to an old lady if you have no sympathy for hedge funds.
In equities markets, for trades of a sufficient size it's not possible to place the order all at once. You'll hammer the order book, and take very suboptimal pricing for the latest marginal shares you buy/sell. Therefore you have to split up the order into chunks.
HFT firms will try to detect when equities traders are doing this. e.g. If they see a pattern indicating that chunks of shares are being bought, they will try to buy, too. When the rest of the order comes through, the price will rise and that firm will make money. That's why "front-running" is just a special-case of an algorithm to predict price movements.
I seriously doubt that a HFT fund as large as Rennaissance uses a single strategy, be it satellite images, or front-running or what-have-you.
I think dsl is quite familiar with the sort of HFT strategy you describe. I think s/he is just trying to correct your use of the term front-running, which was redefined by Michael Lewis et al. from its previous definition as the objectively illegal activity by a broker-dealer. Based on comments like yours, it's a losing battle.
Price discrimination against large traders - grandma gets a better price than Bill Ackman - is a valid and real HFT strategy. They do it in the manner you describe.
But it's not front running. It's only front running when your agent (usually your broker) does it based on private information.
Front running is just a term Michael Lewis misused in his misleading advertisement for IEX.