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by FireBeyond
4397 days ago
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Right. Instead they have small orders placed. As soon as that order is fulfilled on that exchange, depending on algorithms, the HFT will look for opposite orders on other exchanges, and buy, very quickly. If it can do so before the matching engine gets there, then the price can be driven up. For example, you want to buy 10,000 shares of X. Matching engine finds 100 at 9.98 - it’s the NBBO (best buy offer), it’s required to execute that, and carry on looking for ways to fulfill your order below or at your bid. Meanwhile, the HFT offering those 100 shares sees this, decides its a parcel of a large buy, and if it has a quicker route / algo than the matching engine to other exchanges, goes there, executes immediate buys at say, 9.99, then immediately raises their price to make a profit on the spread. |
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What is actually happening is that the HFT is offering shares on all the exchanges on both sides of the bid/ask spread at the same time. When they get filled on an order at a price on 1 exchange it is used as one of many signals to indicate if their pricing is accurate. If their algorithm thinks that fill indicates a price movement (for instance if the entire level was removed) then they will update their prices on all the other exchanges accordingly. If the algorithm doesn't believe this indicates a long term price movement they won't (or they may even re-up at the same price on the exchange they got filled on).
No one is going out and buying ahead of someone else because that is too expensive (you have to pay the bid/ask spread to do it) and too risky (you might be wrong about your price determination).
Finally, just a detail, you can typically opt out of NBBO matching if you want.