Comment by tptacek | Hacker News Reader

Comment by tptacek | Hacker News Reader

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The definition implied by Khan & Lu is incoherent. It refers back to Larry Harris (Trading & Exchanges most definitely does not define frontrunning this way!) to suggest that, in attempting to execute trades for large blocks, traders might expose their orders and "create an opportunity for frontrunning". But that's basically the fundamental challenge of shopping a large block; it implies that essentially all of institutional trading is "about" frontrunning. That can't be right.

But if 51% of Wikipedians believe otherwise, who am I to argue?

I read the whole paper before I commented, but really wasn't remarking on the paper so much as this subthread. If I was going to pick nits, it'd be with the title of the paper and the allusion to _Flash Boys_, which is just a terrible book.

Late edit:

If you want to bring this back to computer science, I think it's helpful to think about this stuff in terms of the CAP theorem; according to our science, the opportunity to arbitrage latency in a continuous market basically has to exist.

FWIW, I have a copy of Harris' book on my desk right now and every explicit citation of Harris in Khan & Lu's paper appears to be accurate--supported by the text in Harris (Chapter 11).

edit: > But that's basically the fundamental challenge of shopping a large block; it implies that essentially all of institutional trading is "about" frontrunning. That can't be right.

That doesn't make the Khan & Lu definition wrong, just that there is a lot of "front running" that occurs. Larry Harris even explicitly mentions this point:

"When large traders recognize that they cannot trade as well as a professional trader can, they commonly hire a professional to help them trade. They may hire a block broker to act as their agent, or they may ask a block dealer to facilitate their trades. Block dealers who facilitate their customers' trade trade their blocks at uniform prices. The dealers then try to profit by trading the block in the market at a better average price. In a sense, block traders are front runners whom large traders hire to help them solve their trading problems"

This is related to the idea of sunshine trader discussed earlier in the chapter before that blockquote.

I have to concede you're right, and that the distinction that Harris draws is not between front-running and "jellyfishing" or whatever we want to call it, but between legal front-running and illegal front-running. Here's Harris's standalone definition, which is what I remembered:

Front Running: Front running occurs when a broker improperly allows one order to trade ahead of another. The order that goes first usually profits from the price impact of the following order. Front runners hurt the traders whose orders they front-run because they take liquidity that the front-running traders otherwise would have taken. These orders then fill at worse prices than those tat which they would have filled.

Front running is most common when a broker holds a large order that will likely move the market. The broker then trades for his own account first, or he tips off a confederate who does the front running.

Front running also hurts the brokers who represent the orders that are front-run. Broker clients who pay close attention to how well their brokers perform will discover that their brokers who knowingly or unknowingly allow others to trade in front of their orders do not trade effectively on their behalf. When their poor performance becomes apparent, the clients often direct their orders to other brokers. Firms that employ brokers must therefore be vigilant to ensure that their brokers do not cheat their clients and thereby lose business for the firm.

This seems pretty cut-and dried.

But, a little later in the book, there's a whole little subsection on "Legal Front-Running By An Observant Trader", ending with "[the front-runner's] trading is legal. Her profits come from recognizing [the broker's] shortcomings as a broker, and from noting that [the broker's] clients tend to split their orders. She is a profitable trader because she is observant and because she acts quickly on her information."

I fully concede this point.

It's of course important to retain the distinction between legitimate front-running and FINRA-style illegal front-running.

In fairness, it's a very Harris-y kind of chapter which cuts against how you might want to understand or talk about front-running with people outside the industry. (off topic: having met the guy I'm not at all surprised by how he constructs this chapter or the book in general -- which I love).

In the dystopian timeline in the movie, they find The Citation's lifeless, sundered husk at the bottom of the ruins of what was once a massive thread. About DNSSEC.

OK I give up what is The Citation a reference to

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