[meric]

You still lose with Limit Orders. Here is how. I also propose how to actually not get ripped off.

The bid price is $100, the offer price is $101.

You want to buy, but you don't want to cross the spread.

You're worried the $101 isn't actually there - i.e. if you place an order to buy for $102, either the $101 order will get pulled by the HFT trader, or the HFT trader will buy the $101 order and sell it to you at $102.

The article suggests placing a limit order without crossing the spread. i.e. Put a limit order at $100.

So you put the limit order at $100. It sits there, and doesn't move.

10 minutes later, another company in the same industry announces below expected results due to market conditions. As this company is in the same industry, its stock price is negatively affected.

Before you have time to cancel your $100 limit order, the HFT trader has already parsed the negative news and short sold the stock all the way down to $99.5, taking your order with it, you're recorded to have sold at $100.

You lose either way.

The continuous limit order market is where HFT has a lot more edge than you do. You can try to avoid placing market orders that cross the spread, as well as avoid placing limit orders that linger for too long and get taken advantage of.

There's a call auction in the morning before the stock market opens every day. No market orders are allowed. Everyone places limit orders and everyone executes at one price. There is no spread to cross. As long as enough other investors participate in the same call auction, it'll be a lot more difficult for HFT traders to take advantage of your order. (Frequency doesn't even come into play since call auctions are discrete markets, not continuous - there is only 1 open price. This negates the HFT trader's speed advantage, since speed is rendered irrelevant)

Just regurgitating stuff I've learnt with finance at university.

[yummyfajitas]

You're worried the $101 isn't actually there - i.e. if you place an order to buy for $102, either the $101 order will get pulled by the HFT trader, or the HFT trader will buy the $101 order and sell it to you at $102.

If there is a sell order @ 101 and you place a buy @ 102, the exchange will instantaneously match the orders. The exchange will then inform the HFT and you (simultaneously) that a trade occurred.

I repeatedly linked to an HFT tutorial which explains this. Please read it.

[meric]

I've posted a response on your blog.

[kasey_junk]

In your example, you did not get ripped off by a HFT, you priced your order incorrectly and lost money. That is the nature of investing and has nothing to do with HFT.

Further, what Chris mentions in the article is not a simple limit order, it is a specific order type (ALO) that will not pay the bid ask spread regardless of how slowly it arrives on the market. If you don't want to pay up for liquidity, this order type will do exactly that.

As for the call auction, it provides a similar functionality but worse price discovery. The prices are more acurrate through the day because it is continuous. You as an investor can decide if paying a more incorrect price is better or worse than paying for liquidity, but in neither case is it an HFT ripping you off. That said, HFT systems do participate in the open auctions...

[meric]

It says the ALO order does not transact with passive liquidity orders, but the point is new information coming through after you've placed your limit order can be taken advantage of by market orders sent by HFT.

I suggested Call Auction because it's a good way to avoid paying the spread, and also avoid execution risk, both at the same time. Yes, the final execution price may be made of limit orders that did not take new information into account, but the ALO order you place into the market will get stale too unless you continuous adjust it, and even if you do, the slow reaction of you and your web browser will be no match for NLP bots scanning the news.

I made a bad booboo with the "You're worried the $101 isn't actually there - i.e. if you place an order to buy for $102, either the $101 order will get pulled by the HFT trader, or the HFT trader will buy the $101 order and sell it to you at $102.", looks like I got confused by the CNBC video I watched the other day. But see the other comment why you might make a limit order will a better price than the best offer.

[kasey_junk]

Right. There are lots of execution strategies out there that let you choose between paying for priority and accurate pricing. The auction is one, as are stops. My instinct is that as a retail you are almost always better off buying the incredibly cheap liquidity that exists in the current market. I can't prove that though.

[umanwizard]

Your example doesn't make sense to me. Why would you place an order to buy for $102 if there is an offer for $101 ?

[jessaustin]

Prices move, so traders add a bit of leeway if they want to be sure the trade will execute. The worry with HFT is that the price will move solely in order to screw over this particular trade, rather than as a reflection of overall market conditions.

[dagw]

Just because there was an offer for $101 when I decided I want to buy, doesn't mean there will be an offer for $101 by the time I get around to placing my order.