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Is Some HFT Front-Running?

Posted: Sun Jul 12, 2009 2:22 pm
by stamo
Is some High-Frequency Trading of U.S. equities actually front running?

There's been a lot of speculation this week that some can 'read order flow' and, in milliseconds, trade in front of it but few hard facts have come out.

Posted: Mon Jul 13, 2009 4:16 am

Posted: Mon Jul 13, 2009 9:52 am
by stamo
Alan Abelson in this weekend's Barron's: 'Sergey Aleynikov … recently left Goldman … (&) took with him the code to the firm's proprietary software for so-called high-frequency trading. … Critics claim that via its special software, Goldman is able to detect huge order positions ahead of their execution, and to profit accordingly; in other words, that high-frequency trading is essentially high-tech front-running. … The hubbub over high-frequency trading grew in intensity and virulence when a slightly befuddled prosecutor told the court, in arguing to keep Mr. Aleynikov in the hoosegow rather than allowing him to make bail, the Goldman code in the wrong hands could lead to "unfair manipulation" of markets. We couldn't help being amused by how ravenously the malapropism was seized upon by hordes of cybernauts, unable to resist the obvious, as suggesting that in Goldman's hands it was used for "fair manipulation." We'd be remiss in not crediting Tyler Durden and his feisty Zero Hedge blog for early coverage of the Aleynikov affair and helping to make the dog days of summer a tad less doggy. We suspect the folks at Goldman may not concur, but think how dull life would be if everyone agreed.'

John Mauldin (frontline weekly email): " … brokers and funds can buy and sell a stock for the same price and still make 0.5 cents (via rebates). Do that a million times a day and the money adds up. Or maybe do it 8 billion times. It requires powerful computers, complicity of the exchanges (because the exchanges get paid a lot), and highly proximate computer connections. Literally, the need for speed is so important that to play this game you have to have your servers physically at the exchange. Across the river in New Jersey is too slow. Forget Texas or California. This is a game played out in microseconds.

"… (T)he rest of us pay for the game, as that half cent is like a tax on transactions, not to mention the increased daily volatility, which skews pricing. Think it doesn't affect you? That "tax" is paid by mutual funds, your pension fund, and every large institution."

"Frankly, this is outrageous. The more I read the madder I got. And it is going to get worse as computers get faster and software more intelligent. We need rules to level the playing field. Themis suggests one simple one: just make it a rule that all bids have to be good for at least one second. That would cure a lot of problems. One lousy second! In a world of microseconds, that is an eternity."

"Goldman Sachs went after an employee who stole some of their latest and greatest software this last week. The US assistant attorney general said in the courtroom that the software had the potential to manipulate the market. Imagine that. I am shocked. There is gambling going on in the back room? Gee, commissioner, I had no idea."

"All this 'algo' (algorithmic) trading also gives a very false impression of volume. If you are a fund and see 10 million shares a day traded, you might feel comfortable that you could hold one million shares and exit your trade easily. But if 80% of the volume is false "algo" trading, that volume isn't really there. You may have a position that will be a problem if you want to exit, and not know it."

"High-frequency trading strategies have become a stealth tax on retail and institutional investors. While stock prices will probably go where they would have gone anyway, toxic trading takes money from real investors and gives it to the high frequency trader who has the best computer. The exchanges, ECNs and high frequency traders are slowly bleeding investors, causing their transaction costs to rise, and the investors don't even know it." (Themis Trading)"

Posted: Thu Jul 16, 2009 6:27 pm
by borderline
Every time someone gets their panties in a ruffle over this you might remind them that they were too chickenshit to vote for Ron Paul. Want to put a stop to Goldman?

Shut down the illegal Federal Reserve.