[kasey_junk]

A) Repeat after me. There is no front running in these scenarios. Front running happens between a client and his intermediary that has a fiduciary duty to him. Other market participants do not have that duty.

B) Yes, market making HFT are routinely fighting against other HFT that are designed to predict their behavior and make money from them.

The case for allowing it is simple. How do you disallow it without having even worse outcomes. There is quite a bit of evidence that suggests that for the average market participant HFT market makers are a positive not a negative.

[josephlord]

A) I wasn't saying that there was front running in the scenario, just that the exploitability of front running by deliberately trying to trigger it was probably a deterrent.

Not convinced about that statement about average market participants, also define average market participant and explain where the HFT's profits come from if not other participants.

How do you disallow it?

My initial suggestion was to slow down cancellations so that they take substantially longer than a new trade does to pass through the system. My perception is that it might reduce the visible liquidity/availability but not the real liquidity as much of the visible liquidity disappears when someone tries to trade against it.

Another suggestion would be to move to a single exchange

[harryh]

Yes, HFTs profit from other participants because they are selling a service: liquidity.

There have ALWAYS been sellers of liquidity. Due to automation human sellers have been replaced by computers that cost far far less. So the cost of liquidity has gone down DRAMATICALLY. Spreads used to be a quarter (or higher). Now they are a penny. That's a 25x reduction!

Here's the chief executive of Vanguard (the world's largest mutual fund company) talking about how HFTs have lowered trading costs for their clients:

http://www.cnbc.com/id/101615521

If you slow down cancellations or otherwise try to slow information flow to HFTs you will simply raise their risk which will force them to raise the price they charge for selling liquidity by increasing spreads.

Stop thinking of HFTers as parasites and think of them as service providers and you'll have a clearer picture of reality.