A Gazillion-Dollar Standoff over Two High-Frequency Trading Towers
bloombergquint.com
bloombergquint.com
The US market has this interesting phenomenon that the futures trade in Chicago, but the single stocks trade in New York. For those who are not familiar, this means you can make a bet on the S&P 500 index as a whole in Chicago by buying or selling futures. But if you wanted to replicate the basket, you would go to New York.
Naturally there's a relationship between the two. If the futures are going down, the prices of all the stocks needs to be adjusted. And if you look at stock prices, it turns out quite a lot of any stock price is simply exposure to the market at large. So you really want to know as soon as possible if the market is moving.
Now you might have thought that the index is the index of shares, which is in NYC, so why does it matter what Chicago thinks? Well actually the tail wags the dog in this case. The futures are how people express a view on which way the index is going, and you want to know that view immediately.
How does it actually work? Variants on "if the market goes down, pull all your bid orders". Basically if things are fine you are happy to look at queue position and imbalance as an indicator of whether you want to leave orders to capture spread with. But the moment there's an indication from Chicago that the market is dipping, you forget that and pull your orders. Or if you're really fast dump a sell order on the guy behind you in the queue.
There's a huge amount of stock trading in NY each day, so it's worth your while to have this line that you use to send the warnings down.
And are the reactions automated based on some NLP? Milliseconds wouldn’t matter if a human has to still parse it, correct?
Acting on M&A news by taking a more aggressive position generally requires more confidence than, say, backing off based on ‘bad’ news. In the first case, you want to be pretty sure of the headline before taking action. In the latter, the mere presence of words like ‘fraud’ and ‘investigation’ might be enough to play it safe and say, “we’re going to back off trading this underlying until a human has a chance to look at this.”
One tends to carry more serious consequences when you’re wrong. Accordingly, the ‘take’ path generally has more checks, and more opportunities to abort.
Yes, you might misread here or there. But this is a game of statistics and the real win/loss is whether you read correctly more often this read incorrectly. You want your net wins to be positive.
Now let’s say there’s negative news on the Chinese economy. Someone could be running an algorithm that sells down companies with Chinese exposure. But, inherently, there likely is a much lower probability that this news is uniform or material across companies with China exposure. A strategy like this likely would get put on small positions and get in and out quickly as it could get run over depending on how humans process the information and make bigger discretionary bets.
There definitely is a risk too all of this. Roughly 10 years ago, somehow an old united Airlines bankruptcy article hit the wire and the stock sold off hard. Eventually, United released a statement saying the article was innacurate. This isn’t typically the type of strategy you would make large, single bets with, or hold the positions over a long period.
I am still not clear why microwave is faster than fiber though. Is it simply that the fiber lines are multi-tenant, so there is not a direct hop?
Oh, and diamond has a large birefringence due to its crystal structure, which would cause temporal smear in signals.
By the way, the uncertainty principle doesn't say we can't have a narrow pulse. Frequency versus time can be used as an analogy to help explain the uncertainty principle. If we know a precise frequency, the signal is poorly localized in the time domain. If a signal is narrowly localized in the time domain, it is poorly localized in the frequency domain. The uncertainty principle is something else, though: it revolves around not being able to make certain related measurements simultaneously, at the quantum level. We can be quite certain about the frequency content of a transient pulse and its exact temporal shape, if it's not something from the quantum domain.
AT&T was going to build out a cross country, single mode, circular waveguide network in the 60’s, but was obsoleted due to fiber. Maybe that’s what the HFT ought to due, or maybe air-line coax.
https://micro.magnet.fsu.edu/primer/java/speedoflight/index....
This is true of multimode fibre, but not single mode. Long haul communications cables are single mode.
It's not pure HF -- there's a fibre link alongside the HF link where stuff like protocol negotiations, encryption keys, channel sounding, feedback on data received and RF conditions, and agreement on what kind of modulation/coding schemes to use for upcoming data (and what transmitted bits are to mean in terms of higher-layer protocol (something about price informations? I don't know much about HFT)).
Likewise, the availability of GPS makes time/frequency synchronisation easier (and combined with sounding signals and feedback over fibre), which very likely allows for eliminating latency-inducing complexity in the receiver.
It's a far cry from the traditional data-over-HF scenario, which is assumed only to be relevant when other (higher bandwidth) links such as fibre or satellite or point-to-point microwave are unavailable, so everything must be carried out over the RF channel (look at ALE).
A cable is not going to be direct. If it's above ground, it needs some slack on the line to account for pole movement (you don't want your fibre holding two poles together...).
You'll need more slack for your splices to be done at surface level during construction. Splice trays every x meters will add more distance.
Sometimes the poles are overloaded and you need to run down and bury it for a while.
Your tunnels are never really straight. You need to follow existing easements, or get your own. When you do bury, you need to go around various physical obstructions, like rivers, buildings, cities, parks.
And if you want redundancy against back-hoe fade, your latency in those situations will shut you down, perhaps erasing your profits when you're down and your competitors are up.
The cost of running your own line point-to-point would be be monstrous, though I guess you could build in some latency and sell access to non-HFTers.
I built a trading platform ~6 years ago that had a 100 microsecond tick to trade (a term that means from the time a market update hits your nic to the time an order leaves your nic).
We knew then that we were too slow for large swaths of the HFT space & wouldn’t even attempt those trades.
I haven’t kept up with the industry but I’d guess tick to trade times at the speed edge are in the low hundreds of nanos now. In an environment like that a 1ms time improvement is out of the capabilities of your software/hardware engineers and can only happen at the network.
https://www.youtube.com/watch?v=L5cZaIZ5bWc
And that was more than 6 years ago, one ticker symbol only. You can imagine now.
That gave me a much better sense of scale than hearing "a trade takes 200ns" or whatever. The engineering that goes into making this possible must be just insane.
In trading you're not calculating nearly as much stuff.
In trading it's probably very sharp, the line between making and losing money. You want to be under 100us for sure. That's micros. Depends on what you're doing of course but 10ms is OOM to slow.
HFT has connections to both and can see the cross. Everyone is better off.
This might be different in the US due to NMS, but HFT strategies are all pretty similar: they can provide liquidity better if they are fast, and other people can take advantage of that.
There's a similar article at When The Speed Of Light Is Too Slow: Trading at the Edge ( http://www.kurzweilai.net/when-the-speed-of-light-is-too-slo... )
The paper that both of these articles are based on: Relativistic statistical arbitrage https://www.alexwg.org/publications/PhysRevE_82-056104.pdf which opens with:
> Recent advances in high-frequency financial trading have brought typical trading latencies below 500 µs, at which point light propagation delays due to geographically separated information sources become relevant for trading strategies and coordination e.g., it takes 67 ms, over 100 times longer, for light to travel between antipodal points along the Earth’s surface. Moreover, as trading times continue to decrease in coming years e.g., latencies in the microseconds are already being targeted by traders, this feature will become even more pronounced.
You don't get any benefit from putting your trading system half way between the two exchanges, you colocate it with one or the other (or both). Likewise if there are three exchanges to trade on, you don't build a datacentre at the circumcentre of the triangle or whatever voodoo geometry nonsense. You colocate at each of the three and buy/rent/build a line for each of the three point-to-point connections. Source: worked in HFT for more than 15 minutes.
Market making in itself provides a valuable service by keeping spreads razor thin and ensuring there’s enough liquidity to satisfy almost any trade at close to the current spot price. HFT is mostly just a way for market makers to gain an edge over each other. In general, it neither helps nor harms ‘regular’ customers. It would hardly be noteworthy if not for the insane lengths that HFT groups go to in order to gain an edge. And, of course, the possibility that a HF system with inadequate controls goes on a trading rampage that significantly moves the markets (see Knight Capital).
How many market makers are there?
> How many market makers are there?
However many the market will support.
How many shoe shops are there?
I’d guess Citadel/Virtuu/Jump capture the vast majority of that business.
https://www.canarywharfian.co.uk/threads/list-of-proprietary...
Then also the associate firms on this list:
I see the importance of market making etc in general, but I don’t see it for millisecond latencies.
Second is the risks to market makers goes up, which means they need to acquire more edge to cover that risk, which in turn widens the bid-ask spread, which makes prices for retail traders worse and will likely reduce liquidity as well.
https://www.technologyreview.com/s/603431/as-goldman-embrace...
It makes the markets more efficient which is good for everyone.
Do you think there was any benefit from having humans do this work? Was there any subjective analysis used, or were these 600 people just human calculators?
The point I am making is that the order books of markets don't accurately reflect the real underlying demand for the securities.
Let's take a hedge fund, who would buy apple at $5. It's incredibly unlikely that they will actually place a bid on the order book at $5 for apple. Instead, they will monitor the price of apple and buy it if they see a good price.
The value that human traders can provide is that they can tap into this hidden sources of liquidity that isn't reflected on the order book of the exchange. They can call up some manager and say "hey I can sell you something at a good price, you interested?"
Without human traders, there is no way to tap into this liquidity. This occasionally causes problems in thinly traded markets or during after-hours trading.
Now as everything has become more efficient, humans are replaced by algos, which are way cheaper. In turn, they also require less for upkeep, and so charge less in edge, which means you have better bid/ask prices, lower trading fees, etc.
It's worth asking what that artificial limitation would actually be, and how it would result in changing the game for market makers.
Continuous limit order book trading (how essentially all exchanges primarily work) is a fairly straightforward concept, and speed is an obvious differentiator for a successful market maker. In general, when complexity is introduced into trading, that creates more ways to exploit the rules for "unfair" gain. Assuming you believe market makers are necessary for a healthy market, you'd have to think of how some other system (like frequent batched auctions) would change the differentiators for successful market makers, and whether those changes are "good" or "fair."
How fast do trades really need to be?
Lets start with a hypothetical 'human speed' similar to how things used to be in the pre-electric world.
What if there were only one trade made per day? If every day buyers and sellers (with price limits in place) were resolved similar to a dutch auction (or some other 'fair' process).
What if that happened every hour? 30 min, 20 min? 10 min?
I think maybe every 10 min could be a good cycle. That would give a human duration of time for a buy/sell blackout (about 60 seconds), plenty of time for everything submitted to be tabulated, signed, and then published, and 9 full min to figure out what you want to do in the next order period.
One big problem with batch auctions as a global solution is that conceptually, trades span multiple markets. You have to figure out how your 500ms futures batch auction is going to interact with the unrelated market for the underlying instrument.
Probably the biggest problem is the problem itself, which, in the case of HFT, probably just isn't enough of a problem to reengineer all of market microstructure to fix. The biggest pure HFT firms are worth just a fraction of the biggest investment firms. Major purchasers of liquidity (pension funds, Vanguard) are happy with the execution they're getting. None of this stuff hurts retail traders (on the contrary, it probably helps them on the whole).
Would love to see some research if it exists.
* They are always willing to trade, so if someone wants to sell/buy a stock, they can get it from an HFT rather than needing to wait for someone who wants it long-term. (The HFT aims to sell it later to someone who wants it, they don't want to keep it).
This is called 'providing liquidity'
* They ensure prices remain 'in sync'. If prices don't match in some sense, then people need to worry about where to get a stock, rather than just what stock to get. The same goes for e.g. keeping stocks in sync with options. This way, someone who buys a stock gets an accurate price.
This is called 'arbitrage'
There is more to these concepts, especially arbitrage. But these are the core benefits of HFT.
"Flashboys" is pretty discredited as a marketing exercise for IEX.
Vanguard say HFT lowers their costs (https://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-...). Hardly seems like just "benefitting the bank accounts of the traders".
https://scottlocklin.wordpress.com/2014/04/04/michael-lewis-...
Remember that most retail investor orders never hit the exchange because your brokerage firm is selling the orderflow to a HFT firm.
Overall, you can say the benefit is that spreads are cheaper to cross for investors. But, you could also make the counter-argument that if things became slightly more difficult to buy or sell, this inertia would prevent retail investors from over-trading by taking a long-term view.
HFT is "stealing" from the big guys and giving to the little guys.
Many startups look for money though venture capital, and not the stock market, because the stock market is so predatory.
People like Elon Musk have gotten in trouble with the stock market for simple things, like thinking out-loud. I'm pretty sure he hates the stock market, and only by law was he forced to sell stocks.
The stock market has transformed many times. Currently large institutional investors like pension plans buy safe stocks. Originally in the 19th century it mostly a way to buy government bonds. In the 1920s buying stocks was opened up to the 'everyman', a person could buy one share rather cheaply. Then came the depression. In the 1950s the stock-market wasn't that important, economy was doing good. Starting in the 1970s traders started inventing exotic financial tools, to make the stock-market less boring. That's how we got into several crashes, most spectacularly 2008.
Since this is how his company has been kept afloat for the last decade I'm pretty sure he doesn't hate the stock market, he just hates the agencies that regulate it.
You're alone in this thread, but no one here has given any real defense of HFT other than "providing liquidity", which is sheer garbage in a world where we have giant speculative bubbles forming and bursting and taking out huge portions of the economy all the time - it requires a real fanatic devotion to efficient markets to be trying to race against the speed of light. This is bunk; prices are just wrong anyway, and markets don't need to be that good as a result. What we do need is less financialization of the economy. Transaction tax all the way.
And the reason startups like VC vs public markets is because they can easily get money on the secondary markets. Going public is a lot of work and comes with a lot of rules. The only reason people did it during the dotcom boom was there was a lot less secondary market capital sloshing around. It wasn't because the stock markets were somehow less "predatory" (whatever that means) back then.
1. Think homes. Consider buying/selling a house and how painful it is to keep something on the market hoping to find a seller (often at a hit if you want to unload quickly.) Or a buyer desiring to purchase something only to have a handful of homes come on the market.
2. Imagine if for every book you read, you could quickly unload the book (or buy new ones) without fire-selling and paying an absurd shipping cost. HFT and market making reduce friction. They are market lubricants.
3. Imagine looking for an apartment to rent and there were a perfect curve of apartments a dollar apart available all the time!
If you are a CS/Physics/Math person who loves to optimize systems then this is a good way to get paid for doing exactly that I guess. Many other problems/industries just require good enough solutions, with HFT it seems that most optimizations are worth it, which makes it so much more interesting.
I personally find HFT kind of a snooze and not especially intellectually gratifying. Most of the work is just wading through bullshit (write in interface to some random exchange , figure out how to remove an instruction here or there).
Imo, things aren't looking so good for HFT. The profits are very slim at this point, and staying competitive is becoming exponentially more expensive. The golden years of super-normal profits and fat bonuses are over.
Note that any answers should be HFT specific. That is, if they apply equally well to trades on a second or minute scale as on a millisecond scale, they probably don't answer the question.
2. Dramatic lowering of bid-offer spreads and, thus, transaction costs to liquidity takers (eg retail investors).
3. No-arbitrage pricing: safe to assume that virtually any easily-tradable instument is fairly priced, otherwise would’ve been quickly arbitraged. Has not always been this way.
4. Driving innovation by paying for technologies/solutions that nobody except HFTs would buy at the time.
Why go around the Earth when you can go straight through it?
[1] https://phys.org/news/2012-03-wireless-message-neutrinos.htm...
Neutrinos may be hard to use but they at least known to be physically possible.
The original Kamiokande detector is still in the ground at the Kamioka Observatory, as far as i know. Hasn't been used for science since the '80s. That's about 300 km from either Tokyo or Osaka, so you probably still need microwaves at that end.
Now you just have to think of a trade with a signal in Chicago and an instrument in Japan. The CME has Nikkei futures, but they follow the ones in Osaka. Osaka has Dow Jones futures, which presumably follow the ones in Chicago, but the volume in Osaka is pretty small. Your best best is probably FX - both Chicago and Tokyo have dollar/yen futures with good volume.
So, who is already doing this, and how long have they been doing it?
The first message sent by gravity wave will be "SELL 400 AMZN"
One thing I am most excited about is the advent of low throughput ( ~100 bps) communication with the rise of neutrino communication. The optimizations needed to use low throughput link would be interesting to see.
I am proud of my work and find HFT to be an interesting intersection of computer science, math, game theory, economics, and psychology
As far as the societal benefit of HFT, I think that it is neutral. It doesn't hurt anybody. It might even help a little bit (liquidity and tight spreads save people a little money and maybe spur some economic growth).
However, this particular aspect (the physical latency war) makes me literally sick to my stomach. I hate reading about it and I hate thinking about it. It's like -- what are we even doing here guys?
Not to mention the practice of front-running and other shady practices that HFT's use to make profit.
The average investor holds onto stocks for months to years. A flash crash may last minutes, before the price is back where it was. How does a flash crash hurt the average investor?
> Not to mention the practice of front-running and other shady practices that HFT's use to make profit.
Front running is where a broker or other agent trades on private information given to them by their client: the broker receives a big buy order from their client and then buys the market up on their own account before executing the client order and making a massive profit. This is illegal.
HFTs can't front run - they only have the same public information at the same time as everyone else. The fact they can execute on that faster than others hardly seems 'shady'.
Maybe it can trigger "stop loss" orders?
> Maybe it can trigger "stop loss" orders?
The average investor is a person who has a pension invested across a range of funds held with large fund management companies. Anyone mis-using stoplosses is not an 'average' investor.
It's not illegal, but it is still front-running the rest of the market due to latency arbitrage. Check out Flash Boys by Michael Lewis for more on the topic.
As you say, this is just arbitrage on public information. Latency arbitrage has been occurring for the last 200 years at least, it's an inevitable outcome of any system with multiple, geographicly separated markets.
P.S. I read Flash Boys. It's not very good.
They just happen to be the first among all participants to react. Why is that bad? Somebody has to be first
Not anybody in particular but it does hurt society as a whole. It's one of those things that make the rich richer for no reason other than them already being rich.
IE, Facebook is a giant waste of resources but they employ many of the world's smartest engineers. Because of that they've spawned things like ReactJS which has completely changed web development for thousands of other companies.
I consider HFT to be no worse of a brain drain than, say, Instagram, or any similar virus
There are perhaps 4-8 significant players in the HFT space, all employing anywhere between a few hundred to a thousand people. Probably less than 5000 people total, and if you only include programmers and quants, maybe less than 2000. Google alone has 30000 programmers. How many of them are optimizing ads for eyeballs vs “benefiting the country/society/humanity”? What about the thousands of programmers making video games mechanics more addictive for children? I think it’s silly to focus on one tiny industry, and demand that those people should be working on things for the good of humanity, when the fact is the vast majority of humans just work for their own livelihood. I mean, what do you think 95% of the people in SV are doing? Not every company is trying to cure cancer or explore space...
HFT is such a small, niche, industry, and also extremely productive per employee relative to most other industries. (the primary reason for comp being so higher). It replaced the thousands of manual traders that used to be responsible for arbitrage and market making with automated robots, dramatically increasing market efficiencies while reducing the amount of human capital required to provide those services. I find all the virterol towards hft from SV very puzzling, as it seems to exemplify all the things that SV espouses!
I might be missing something, but isn't opportunity cost a good argument for HFT?
HFT employs far fewer people than pre-HFT trading that came before it.
You want to see what happens without HFT. Look at the crash in 89, when human market makers would no longer answer their phones because they did not know what was going on in the market.
Instead of the crash recovering in minutes, it took hours and had larger widespread effects.
Furthermore, exchanges have now added automatic pauses in trading during highly volatile times, to let traders figure out what is going on.
The markets are objectively more stable, more efficient, and tighter, and better for the general public now with HFTs than they were in the 80s and 90s with human market makers/brokers.
I won't go as far as to say that it's a feature not a bug. But I will say that the problem is currently the least problematic that it has ever been. Because of HFT, stability returns within minutes, rather than hours/days/weeks (which is how long it used to take before various technological innovations)
Ideally this would keep a lot of tower-construction people continually employed and paying taxes, building new towers ten meters in front of the old ones every month or two.
'A pair of high-frequency traders go up against their old boss in an effort to make millions in a fiber-optic cable deal.' (It also seems to feature the microwave based approach from the trailer).
I don't see this HFT as being information-worthy arbitrage. I have an intent to set a real-world price, I declare it, and in the increment of time it takes my packets to flow, somebody edges in the queue and inserts trades to make me have to deal with them for some increment of price. I wind up paying more, and the original source winds up getting less, or some other event.
its like re-intermediation, in a world heading to dis-intermediation.
What is the real-world, wider economic "good" here? If my pension fund is routinely profiting from this, I am not sure that is a wider good btw: We could probably make more money selling Heroin, if we're going down this 'whatever it takes' track...
This is the biggest mistake people make when talking about HFT. At no point in time does someone see your order before it hits the exchange (unless you’ve specifically agreed to trade that way & even then they are obligated by lots of regulation to execute in particular ways to protect from that agency problem).
No HFT is taking pennies from your order. If you send a limit order through the book you will get filled at the best price available up to your limit.
The article reads fine w/o JavaScript, desktop Firefox. And the back button keeps working. I assume that's thanks to the absence of JavaScript, rather than something special that Firefox is doing.
Anyway... why is this important? Because immediately following the sweep in e.g. ES, option prices in e.g. SPX options are temporarily way off. Dutch market makers have not yet moved their options quotes, because they do not yet know about the sweep - at least not in NJ. If you can somehow get orders to NJ faster than market makers can cancel their option quotes, you can take out hundreds of mispriced options. Multiple expires, dozens of strike, puts and calls. Very juicy bunch of stale quotes.
PnL... well that gets tricky. On one hand, just this one example is in theory worth hundreds of million per year if market did not respond. But the market will respond. That’s inevitable. No one enjoys being ripped off for too long, so if they cannot defend they will either leave the market or set quotes wide enough that they are never mispriced. The same goes for any other “latency arbitrage” game. I always love how people throw numbers like “this is worth X”, almost always assuming status quo. HFTs are very responsive to market conditions. If I run a strategy that’s been making money every single day for 10 years and all of a sudden it starts losing - I press the pause button and go do some serious analysis. So maybe I will let you have it for few hours - but after that if I can’t compete I’m out. So it’s not that simple.
However, over the next few years, the advent of maturing ML frameworks, coupled with the intensifying war and ratification of standards over 5G/IoT based infrastructure, might prove to be serendipitous for nimble-footed enterprises.
In my (probably simplistic) view, exchanges could publish and process orders at long intervals (seconds, minutes, hours?) then add a jitter of several intervals to incoming orders, with cumulating jitter for cancels. That would require traders to look beyond one interval when trading.
If I'm racing other people's orders on the sub-second level then I care. But what's the point of that? Why should people spend their lifes on it? Why should we as a society bear the cost of this activity? I'd rather see people do something with external benefits.
Being fast is important for cancels & risk management. Which answers the question on what it provides. It lowers the risk for the traders allowing them to price tighter.
For HFT traders to make a profit, somebody else must lose. In my understanding, the ones to lose are the other traders. If I want to buy shares, part of the price of buying them will go to HFT traders. And my revenue of selling them will be lower due to HFT traders on the exchange.
Market makers take on the risk bridging those 2 areas. They hold positions for short periods, with the hope of making money when a new participant enters the market. They lose money when they are holding positions that the market goes against. To account for that, they price their risk into what they are offering you. The less risk they take on, the better price they can offer you.
If you want to buy shares _right now_ you are going to pay someone for the privilege. Modern HFT are offering that service cheaper than any other implementation before.
So you don't pay for it in that case, but you still get a benefit.
s = r(theta)
l = (2r)sin(thea/2)
s: arc length (air travel distance 714 miles)
r: radius of earth (3,958.8 miles)
theta: arc angle
l: length of cord (straight line under arc)
(s-l)/l * 100 gives the % increased difference in length
The neutrino route only needs a single detector at the very end, nothing along the way.
In short, when you send an order from your computer to buy say 10000 stocks, this order gets split to all the multiple exchanges. When the order hits the first (closest) exchange, HF Traders will pick that up and race you to the rest of the exchanges and try to front run you by buying the stock in lower price if available and make an offer to your bid price that they know is coming.
1. This is not 'front running', this is just other parties reacting to and executing on public market data before you. The term 'front running' is understood to mean something specific, and different.
2. Orders don't get split across multiple venues by accident. It's a conscious decision. Anyone who chooses to route multiple orders to different venues in a way that causes an information imbalance (ie, so the orders hit the venues at different times) is going to get their lunch eaten by the rest of the market. Only idiots do this - the rest of the world times their orders taking transmission latency into account.
Could you elaborate on this please? Say I want to place an order for 100 shares of XYZ at $100.00 per share. I know my trade is going to take 50ms to get fulfilled. What do I do with this information? Predict where the price is going to be?
> Could you elaborate on this please? Say I want to place an order for 100 shares of XYZ at $100.00 per share. I know my trade is going to take 50ms to get fulfilled. What do I do with this information? Predict where the price is going to be?
Simplistically, If you're making an order that's too big for the order book on a single venue to get a sensible price, you might chop it up and buy some in NY, some in London and some in Tokyo. Let's say you're sat in NY: you can work out that it'll take your order 1ms to hit the NYSE, 150ms to hit the LSE and 600ms to hit the TSE. So rather than dumbly hitting 'transmit' on all your orders at once, you send the Tokyo order first, then then the London order 450ms later, and then the NY order 149ms after that. That way, your orders (and the public information that your making those orders) will hit each venue at exactly the same time.
This is common practice for any broker or institutional trader.
I guess that depends on what you consider public market data.
> Front running, also known as tailgating, is the prohibited practice of entering into an equity (stock) trade on advance, nonpublic knowledge of a large pending transaction that will influence the price of the underlying security
When an order hits an exchange, the exchange sends a flash order to the owners of the proprietary data feeds before sending the trade information out on the broader public markets, and making it available to all potential investors.
It seems to me that the owners of those feeds have advanced knowledge of non public data.
> I guess that depends on what you consider public market data.
Usefully, the regulators define it for us. No consideration needed.
> When an order hits an exchange, the exchange sends a flash order to the owners of the proprietary data feeds before sending the trade information out on the broader public markets, and making it available to all potential investors.
> It seems to me that the owners of those feeds have advanced knowledge of non public data.
Can anyone buy one of these feeds? If so, it's public data.
"Non public" means something very specific (and different) in this context.
The exchanges have always had participants with more access to faster info than other participants. Electronic feeds & order gateways are orders of magnitude less expensive than the previous open outcry regime.
This specific behavior was only exhibited by DirectEdge (I don't recall if it was a registered exchange at the time, or just an ECN). The behavior was indeed scandalous because of the overt pay-to-play overtone, and was eliminated fairly quickly. Lewis somehow managed to mischaracterize all on-exhange HFT as this type of trading.
I like "Flash Boys: Not So Fast" as a corrective.
A much better book, from another HFT skeptic, is "Dark Pools".
The example you provide (of basic, naive latency arbitrage) matters for trading desks at giant investment banks. They make their money in part by selling execution services to giant holders of stock. Major trades by these people (big "blocks" being "shopped") are tradable market news. The giant holders of stock would prefer it if the news didn't get out until after their orders were filled. That's a service people like Katsuyama used to be able to offer his wealthy clients with very little effort on his part. That service has since been automated away, and it bothers him. I guess I'd be bothered too, but I'm not sure why it's moral dilemma.
Front running isn't a technical problem and it has little to do with how fast traders are. It's an agency problem: a broker "front-runs" their client when they receive an order from that client and make proprietary trades against and ahead of it. Random people in the markets don't have an agency relationship with other traders and are under no obligation to avoid competing with them.
Flash Boys is a great book and we required our new hires to read it as it got a lot of things right.
Front running is illegal now, but arbitrage opportunities still exist between exchanges. Being fast is still an easy way to make money.
You're right about dark pools though. Those are the future (honestly they are already up and functioning) and they hide trading activity very well.
And once you are fast, you have to stay fast. Remaining fast is not easy or cheap either.
Sure, if you have the part that’s really hard to get right, making money is then really easy.
Front running has always been illegal.
Arbitrage is not illegal. Latency arb certainly isn't easy.
"Dark Pools" is a book. It's also a thing, but that's obviously not what I was talking about.
There's nothing especially shady about dark pools. We'd call them "private exchanges" if the exchanges weren't themselves already private companies, I think.
Nowhere did I imply that arbitrage is illegal and latency arbitrage is a big driver of revenue for several hedge funds, especially those which track baskets against their components.
There isn't anything shady about dark pools, except that there is little public information about the trades which take place within them, they are sparsely regulated, and you have even less insight into your counter parties than you do on open exchanges. And my response referencing dark pools was a response to your comment about execution services.
Being fast is not an easy way to make money. It's an incredibly hard and difficult way to make money. I don't know what kind of HFT you worked at, but I guess you just plugged in a laptop to a GBit/s network line and plugged away making "easy" money?
Also, the first dark pool was created in the 80s, so you're a little late on that development as well.
I love exchange technology, it is the beating heart of capitalism and I enjoyed working as a plumber in the machine.
Josh Levine is an inspiring idealist.
Feel free to read it but remember that IEX & Brad Katsuyama work on behalf of one set of market participants that are decidedly against the interests of other market participants such as retail traders.