[harryh]

The HFT guys aren't buying 90,000 shares on the other exchanges. They're just updating their ASK price on those exchanges to slightly raise the price to reflect the new information that just hit the market. If someone wants to buy 100,000 shares RIGHT NOW it's a good sign that the price should be going up. Katsuyama/RBC were used to their proprietary information staying a secret that only they knew for longer before the HFTs jumped in and made the market respond faster.

That might be a bummer for Katsuyama/RBC but it's great for everyone else on the market who now benefit from a price that updates faster.

[jcampbell1]

How do you "update" your ASK price? They are either front running by buying the shares at $15.00-$15.01, or, if they are their own orders, then they cancel them. It is the same thing.

If someone wants to buy 100,000 shares, and the market says there are 100,000 shares available at $15, the order should complete at $15.

[harryh]

You update your ASK price by canceling your order and submitting a new one with a different price.

> If someone wants to buy 100,000 shares, and the market says there are 100,000 shares available at $15, the order should complete at $15.

As long as they submit their matching order while my bid is still on the books that's fine. But why should I be required to keep my order on the books for any longer than I want to?

[jcampbell1]

You should be able to cancel you order at anytime. What you shouldn't be able to do is to stiff other people's trades, and then use a microwave antenna to change your order before the other person trade arrives.

[harryh]

What you think is happening in the world is not what's actually happening.

What's happening:

1) A large block of shares is traded on exchange #1.

2) HFTer notices #1 and very quickly updates the price at which they are willing to buy/sell on exchange #2. No one has any sure knowledge of trades on their way to exchange #2. They can guess. They can infer. But they aren't seeing any actual trades before they hit the exchange.

[001sky]

Please explain how you would do this in an open outcry market.

You're talking about front-running the trade inbetween the "sell" decision and the receipt of the signal at the exchange. In otherwords, your bid/offer is in bad faith. I can advertise a car for sale and then when you walk in remove the price and mark up the trade. You cannot do this in an open outcry market. Because it would be subject to retaliation (of various kinds).

Providing bid/ask indication in bad faith is NOT liquidity. Liquidity is not layering a trade to double the volume.

HFT does not increase liquidity. It increases volume, at best. But so does front-running. The bait and switch issue and the front-running issue not interchangeble, but they are closely linked.

Market micro-structure is difficult to discuss because most people are completely ignorant of the mechanics. Its easy to pass of volume for liquidity and to disquise front-running as "market making" or speculation. It is clearly distinct.

[harryh]

Market makers are in the business of selling liquidity. They're saying "maybe no one else wants to buy/sell this stock but here I am and I always have a bid/ask on the table." You don't have to trade with them. But a lot of people do every day.

Why do you think those people are trading with market makers if they're doing such shady things?

I don't think you really understand the business that market makers are in. They aren't in the business of trying to front run people. They're in the business of making a penny a share on all the trades that go back and forth. But they face a big risk. When they're busy buying/selling for $50.00/$50.01 what happens when a big & smart hedge fund guy comes along who has new information and knows the price should really be $50.10. They try to buy up as many shares as possible at $50.00 and suddenly the market maker is fucked because they're no longer market making in a stable market.

So the market maker has this big challenge where they have to do a good as job as possible detecting the big & smart hedge fund guy and quickly adjusting the price so they don't get squashed. If they can't do a very good job they have to increase spreads so they make more money in the steady state to make up for their bigger losses. If they do a really good job in this detecting they can lower spreads.

It turns out that HFTers are really good market makers. You can see this because they've successfully competed against each other to the point that they can lower spreads all the way to a penny (a 10x reduction of where they used to be!).

When you look at it this way you can see that market makers aren't trying to screw the big traders, they're trying to avoid getting screwed so that they can better serve everyone else by offering lower prices (lower spreads).

The nice side effect of all of this is that price information gets better communicated to the market faster. If you happen to be randomly selling your MSFT when Mr. Big & Smart shows up you're more likely to get the best possible price due to all the information being correctly communicated to the market.