[noonespecial]

Its a bit of a joke. Its a network thing, not a finance thing. What it does is adds a delay and more importantly, a bit more random delay to the time it takes the order to reach the exchanges server. Once you add in the non-determinism, HFT basically falls apart because you can't take your truckload of cash and buy yourself a place in a datacenter that's 2ms closer to the exchange and front-run everyone.

It would be a wonderful thing to see all of those millions these guys have "invested" shaving a millisecond or two off their transaction times laid waste by a single command.

[dzderic]

This "solution" will only make it harder for regular folks to execute orders, since HFTs will beat the randomness by shooting multiple orders through multiple order gateways.

[noonespecial]

Guess we'll need a hierarchical token bucket with stochastic fairness queueing as well.

We don't just need it to be random. We need there to be no way of ever quite knowing if any given order will beat another order to the exchange (within a given time period, of course). They won't know if they can beat joe ordinary, and they definitely won't know if they can beat the other HFT's. That might be enough to put a lid on it.

Edit: For those playing along, here's the metaphor. Joe goes to market to buy sheep. Bill knows Joe is going so he sends a fast runner ahead of him to buy the cheapest sheep in town first so he can mark them up and sell them to Joe when he arrives. We try making everyone wait at the town gate for a random amount of time to give Joe a chance to arrive and get through. So Bill (being very rich) just sends 10 guys so one is very likely to be let in before Joe anyway. Next we introduce the stochastic filter. We make everyone line up and then shuffle the order every once in a while, but Bill still has more guys so he might still get one in first more often than not. Finally, we add the token bucket. For every one guy that we know employed by Bill admitted, we make the next one wait twice as long to get in, so if Joe and 10 Bills show up, Joe and the first Bill are essentially on even footing again because the 2nd through 10th Bill would have to wait too long to matter.

[gd1]

"For those playing along, here's the metaphor. Joe goes to market to buy sheep. Bill knows Joe is going so he sends a fast runner ahead of him to buy the... "

Seriously, how many times have we discussed this issue on this site and we still get this bullshit. Bill doesn't know Joe is going. He doesn't. Get it through your thick heads.

[mrow84]

Somewhat farcically perpetuating the metaphor, is it not the case that Bill gets to know that Joe is interested in buying sheep once Joe has bought a few of them? And at that point Bill can outrun Joe and make money from his (very near) future purchases?

That was my reading of the article - it seems that either there is a flow of information from the trading events to the fast traders, or the scenario portrayed in the article was very unlikely (though I guess that couldn't be ruled out given how much trading there is). noonespecial's metaphor seems to apply, what have I misunderstood?

[twoodfin]

Somewhat farcically perpetuating the metaphor, is it not the case that Bill gets to know that Joe is interested in buying sheep once Joe has bought a few of them?

He doesn't know with certainty. He can guess that's what Joe is doing, but he could be wrong and be stuck with sheep that he can't sell for the price he intends to ask. Every second he owns sheep is a second he's taking a risk that they'll go down in price, not up.

[mrow84]

Yes, that makes sense. From what I understood of the article, and it really isn't my area so maybe I got something wrong, a buy order was not filled completely even though there were sell orders available to fill it. Doesn't that mean that people cancelled their orders whilst the buy was being filled, meaning that they must have been able to execute market actions out of order? That would put people who can act quickly at a big advantage on getting the price they wanted, because they can cancel and re-bid at a higher price. Sure it's a gamble, but it seems like one with little to lose.

I've probably misunderstood something, but it certainly seems to be an issue that gets people very exercised. I presume there must be some competitive advantage in being fast, otherwise people wouldn't do it, so surely the only real issue is whether or not the consequence of exercising that advantage is socially advantageous?

[noonespecial]

Its a somewhat leaky metaphor I grant you. So how does Bill have information about what Joe is doing? Joe certainly tries not to telegraph such things for obvious reasons.

From what I've gathered, through methods like "pinging" the market with many tiny transactions in likely spots, Bill can sound out what Joe is doing in the sheep market. Supposedly the market exchange will also "flash" the information about buy and sell orders to the HFT's in favorable network locations a few ms faster than the general public as well. Figuring out that Joe is buying sheep are what all of the "brilliant minds" that are heading into HFT everyone is talking about are doing. They're watching the road for Joe. Also Joe is not a small investor, he's a rancher that buys lots of sheep. Small investors don't place the kind of orders that HFT can attack.

Do note that this metaphor really only applies to the Front Running section of HFT, and really evolved from a fanciful attempt to coagulate network layer and application layer solutions into one magical unicorn fix. (Its kind of more about how tc works in linux than how markets work. :) )