[devingoldfish]

The book explains that one company was running their own fiber optic cable between Chicago and New York to shave a handful of milliseconds off the latency. HFT firms also built their trading desks as close as possible to where the fiber terminated in New Jersey. This isn't the speed of your mom's google query, they were literally running up against latency caused by the speed that light travels down a cable.

[Animats]

Right. If you're totally unfamiliar with HFT, you don't realize how far they go to get latency down. Computers are too slow for HFT. There are trading algorithms written in VHDL and loaded into FPGAs which are looking at packets as they come in over gigabit Ethernet.[1] (That description is four years old and out of date.)

All this is really to achieve front-running, executing an order after another order has been submitted but before the first order is executed. This is betting on a sure thing. It's also illegal.

[1] http://www.wallstreetfpga.com/resources/fix-on-an-fpga/

[harryh]

Your understanding of what defines front running is incorrect.

Front running is when your stock broker gets an order from you but then turns around and executes an order on his own behalf before he executes yours. This is illegal because your broker has a fiduciary duty to you, his client.

It's not front running when I see an order on one exchange and then, very quickly, go make an order on a different exchange. It's not illegal because I have no fiduciary responsibility to any of the other people involved.

You have no right to execute multiple orders on different exchanges atomically.

[Animats]

If someone paid for order flow or fast access so they could do that, it's illegal.

[tptacek]

If that's true, you should be able to cite a statute, an SEC/FINRA/CFTC rule, a court ruling, or an exchange rule to explain how (allowed and prohibited behavior on markets being defined by all four of those kinds of sources, frustratingly enough).

I suspect you won't be able to find any such source. Malfeasance by trading firms makes career cases for prosecutors.

That's not to say, normatively, that that's how things should be: obviously, prosecutors are not making much of a dent in the trustworthiness of big financial firms.

[harryh]

No. It's not.

Once orders hit the market it's public information and you can do whatever you want with it. If you can do it faster than anyone else then go you!

[tptacek]

Can you explain in detail how an HFT would use an FPGA to "front-run" a trade? I suspect you're using that term differently than either professionals or the SEC do.