[dclusin]

As I understand it, George W. Bush deregulated the stock market and allowed multiple venues to compose the market. This resulted in stock trading becoming distributed among multiple venues. When a retail customer submits an order to an exchange they are required by law to give the customer the best price available (no front running). Since exchanges are now distributed they must communicate to ensure the best price is given to the customer. If a market participant can outrun this calculation by placing themselves on exchange A and exchange B simultaneously and transfer the information faster than the participating exchanges, then they are effectively able to front run the customer. There are no rules around this outrunning of the best price calculation, although most people agree there ought to be because it makes execution quality worse.

A technological solution to this problem is to either execute on alternative venues such as dark pools where the price and possibly quantity are hidden from all participants, or use an algorithm such as VWAP to hide your intentions. Smart money already does both of these. If you submit block orders to a public exchange now a days you're considered foolish and are getting a bad deal. The reason why this keeps coming up is because the rubes are finally starting to realize what wall street already knows: they are getting screwed.

You do make a cogent point about discussion of automated trading being laughably imprecise, but your argument doesn't really debunk the immorality of the behavior that is occurring.

And finally, your point about non-farm payroll is a non starter for me. What you are talking about is informed order flow (wall street), VS. uninformed order flow (you and me). When non-farm payroll is released designated market makers have been known withdraw from the market because the price is being corrected by the informed order flow. When volatility quiets down they re-engage their market making activities.

[kasey_junk]

"As I understand it, George W. Bush deregulated the stock market and allowed multiple venues to compose the market. This resulted in stock trading becoming distributed among multiple venues. When a retail customer submits an order to an exchange they are required by law to give the customer the best price available (no front running). Since exchanges are now distributed they must communicate to ensure the best price is given to the customer. If a market participant can outrun this calculation by placing themselves on exchange A and exchange B simultaneously and transfer the information faster than the participating exchanges, then they are effectively able to front run the customer. There are no rules around this outrunning of the best price calculation, although most people agree there ought to be because it makes execution quality worse."

Your understanding of what is going on in latency arbitrage is incorrect and implies that a latency arbitrage trader can see your order before it executes on an exchange. This is not true.

Further, the only people who think independent price synchronization provides worse execution are large block liquidity takers. That is large institutional investors who have the intention to remove all the liquidity from a group of exchanges. They have always tried to hide their intentions so that the market cannot take those intentions into the account. They are now using scare tactics to make it seem like this is a problem when in fact it is the markets behaving as they should.

Market segmentation & correct price discovery help small retail investors not hurt them.

[minimax]

That is large institutional investors who have the intention to remove all the liquidity from a group of exchanges.

One of the central themes of Flash Boys is that this (sweeping multiple market centers) is somehow a hard thing to do. I think to most practitioners it seems like Brad Katsuyama and RBC were just exceptionally bad at it. Yes you have to invest a little bit in technology and network connectivity, but the big sell-side banks have the money to make those sorts of investments. Given that they got paid to competently execute these big trades, it seems almost inexcusable that their excuse was like "We didn't actually understand what was going on."

[kasey_junk]

There are all manner of odd themes in the book. That Brad Katsuyama got paid exorbitant amounts of money to execute trades poorly for large institutions is presented as a virtue, even though his bonus came specifically from those large institutions profits we are so outraged that HFT is trading against.

My favourite one is a section where Lewis starts naming HFT algos and they invariably have names like Dagger, Viper, etc. yet he never seems to point out the HFT Brad Katsuyama created was named Thor.

[dclusin]

I work in FX, so I'm unfamiliar with the exact workflow. Say I submit a buy order for 1k shares of AAPL to BATS. What exactly happens?

[minimax]

If BATS has the best price or matches the best price available in the market, your order will execute at BATS. If there is a better price available at another market center displaying a protected quote, BATS has to route your order to that exchange.

[dclusin]

Continuing with the example, lets say I'm trying to hit my price, and only 300 shares are available on BATS and another 700 are available on some other venue. Would BATS send an order for the remaining 700 to the other venue, or does it only route the order and not chop it up?

[minimax]

Depends on the routing instructions in the order, but generally speaking if BATS matches the best price then BATS will match as much as it can against the liquidity that is available at BATS and route the remainder. See page 2 of this PDF for BATS: https://www.batstrading.com/resources/features/bats_exchange...

[dclusin]

Thanks for the info