[harryh]

Your intuition about financial markets does not match reality. In financial markets no one knows that you want to buy a gallon of milk (or a share of stock) until your bid has already been submitted. No matter how fast their Ferrari, there is no way for them to get in line ahead of you at the store.

[hm8]

Well, there is in a matter of speaking. To take the analogy further, imagine not buying a gallon of milk but 100,000 1 gallon can of milk. The guy with the Ferrari wouldn't be able to get in front of you at the next door target but they'll loot the most convenient Walgreens, Safeway, Walmart, and Amazon Prime. Of course, the analogy no longer holds for numerous reasons (100000 gallons of milk, driving around, buying from the farms directly) but the point is the Flash Boys work on the likelihood of such an event happening which, believe it or not, is fairly common in the stock markets these days. Think, mutual funds, ETF managers, etc. This is now, largely, considered the cost of doing business.

[harryh]

If you want to by 100,000 gallons of milk you don't have a god given right to do so at the currently posted prices in every grocery store in town. Those grocers are well within their rights to raise prices as soon as they figure out what you're doing.

[hm8]

The grocers' price is irrelevant to the discussion here.

The guy with the Ferrari would still outrun you and offer you a new price, with a margin just enough for them to be profitable, yet not substantially large as to talk you out of the deal altogether.

[fleitz]

Yeah, so if you're not a fucking idiot, instead of taking out a front page newspaper ad announcing to the world that you want to buy ALL THE MILK.

You should instead send 4 or 5 trucks to each location and buy the available milk, the guy in the Ferrari cannot outrun you because you're already there, and your order filled before he even got there.

Now imagine that you have at your finger tips a giant constantly updating database to the nearest millisecond about how much milk there is at every grocery store, but you still decide to take out a front page ad and announce your plans in advance, instead of breaking up your order into multiple parts and sending each to its own store. If you did this, everyone would laugh at you like they are at IEX and Capital Group.

[hm8]

Like I said in the original comment, it is pointless to get bogged down in the analogy because it doesn't reflect the truth accurately. However, you guys are continuing down the path an down-voting a perfectly legit argument. The purpose of an analogy is not to maintain fidelity to the original scenario but to simplify it to convey the point of author (otherwise it ends up getting as complicated as the scenario). The analogy is only a coarse approximation of the actual scenario, a best-effort attempt to drive the point across. I'm disappointed with the unreasonable down-votes and the explanation provided.

[ycombobreaker]

On the contrary, the grocers' prices are the very heart of the matter. You see, the Ferrari neighbor may be HFT, but so are the grocers. And every grocer wants to sell their goods at a newly-higher price if they get wind of a big buyer, because it will cost them more to restock if you buy everything. So they will naturally raise their prices. If you buy from the grocers one at a time, expect them to call the other stores (ok it's a chain grocery) to alert them. You will pay a lot for your last milk purchase, unless you stop buying because the asking price has gone too high. If you instead have milk trucks make synchronized purchases across town, you will pay the same price everywhere, and all of the grocers will be upset once they realize what happened. If you do the synchronized milk truck plan enough, the grocers may permanently raise their milk prices at the expense of losing a few other price-conscience buyers.

In reality, this occurs i the stock market because the "national market" consists of something like 15 different exchanges in a big distributed system, so there are race conditions. HFT market makers trade on all of the exchanges, and adjust their prices based on trading demand seen from other exchanges. They spend a lot of money on fast networks between the exchanges, so that they can be/beat the proverbial ferarri. But synchronized trades a la tgemilk trucks or Katsayuma's "Thor" cannot be raced against.

IEX is intended to partially commoditize the Thor approach: take the advantage away from the grocers (HFT, market makers) and give it to the big milk buyers (institutions like hedge funds and pension funds). Retail trading is not affected one way or another.

[harryh]

Once the grocers raise their prices, there's no margin left for the Ferrari owner to capture.

[hm8]

There is still a margin if the intended buyer was willing to pay more or would just want to buy the milk at whatever price offered. Of course, the grocers could keep raising the price arbitrarily but there is still a delta that the guy in the Ferrari could overcharge. I think you understand the point we are trying to get across but just trolling it. I'd have appreciated an honest discussion rather than a trolling attitude.

[harryh]

I'm not trolling.

The situation I'm describing is literally what happens in the real world. If a large trader wants to buy a big block of stock such that he can't fulfill the order on a single exchange he has to be pretty careful about how he executes the trade or the market will move against him. As soon as he purchases all the stock at the market price on a single exchange those selling stock on other exchanges will raise their prices.

It's very important to understand this. The price doesn't (generally) rise on other exchanges because someone swoops in and buys up all the supply. It rises because the people who were selling in the first place change their offers.

[whoops1122]

Ohh there is a way to do it, and it is a show on 60/60. I think to be specific, there is a delay between NJ switch to Wall st, so some ppl tap in the switch in NJ, know what you plan on to order, then make their order use a different route to wall st... this was well documented. I dont know if it still exist though.

[15thandwhatever]

This is the complete opposite of what is happening.

What you're describing is straight up hacking, and if there was as clear of a breach of the law like that, we wouldn't be having civil discussions about whether HFT is good or not.

Besides, almost nothing routes to Wall Street anymore. Especially not for stocks.

NASDAQ's trading platform is in Carteret, NJ. NYSE's trading platform is in Mahwah, NJ. Most HFT firms, if they're not already colocated in Carteret or Mahwah, are located in Secaucus, NJ.

[phonon]

Maybe you should read "Flash Boys" then. They can and do. Orders start at one place, and by regulation then can get sent to many other markets. If you can go to those next markets a little faster, you can front run the order.

[harryh]

Maybe you should read "Flash Boys: Not So Fast" then. It highlights a lot of errors in Flash Boys (which I have, in fact, read).

https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-...

[MichaelGG]

Flash Boys uses a totally fabricated use of "front running". It's worse than people that call copyright infringement "theft". That book is probably one of the worst books I've read as far as accuracy goes. At least that I'm aware of.

Seriously, at one point, Lewis suggests that the trading station of some big trader is hacked. That just by typing numbers without submitting an order, stuff jumps. This should send huge red flags off on anyone that's even remotely familiar with anything similar to a computer. But it's another "see how rigged it all is?" anecdote blended in with his nonsense.

[15thandwhatever]

Some programmers don't understand latency, so there's no hope for anyone who's not familiar with software development to wrap their head around the concept of "yes, things happen in milliseconds".

Which makes it all the more easier to get away with anything that sounds as sensational as this.

https://gist.github.com/jboner/2841832