Even if HFTs had access to other private entities orders, it wouldn’t be insider trading. No insiders are involved.
Front running is a very specific practice with a specific definition. HFTs don’t have clients. By the definition it’s impossible for them to front run anyone.
My question is simply if Holder wanted to attempt a case, wouldn’t he be more likely of success if he went after the institutions with clients? Or is the definition even more specific?
To be guilty of front running a broker has to have clients. Holder would have to show that there were specific client orders that the HFT firm was buying in front of for their internal account prior to executing as an agent for the client.
Imagine Warren Buffett loses his mind and says on CNBC that he is planning on buying as many shares of Microsoft as he can up to $50. The first people to digest this information would buy as much as they could up to $50. People buying on that information are not front running in the legal sense of the term.
Now imagine Warren calls his broker at JP Morgan, says the same thing, and gives them the order. The broker then tells his trading desk about Mr. Buffett’s intentions, and they buy as much stock as they can. That is front running. To be guilty of front running a broker has to have a fiduciary relationship with a client.
And for the rest of the story about this definitive paper… High-Speed Trading Totally Fine, Says Columbia Researcher Financed By High-Speed Trading Firm
Great post septimus.
Do you work for FOX Trom?
BS, front running is getting in front of an order. You don’t have to have clients, you just have to have the order flow. Generally speaking HFT are picking off clients, are not market makers and do jack shit to increase liquidity.
Market makers take on risk. HFC by definition are trying to trade ahead of market orders and then onload those same orders a fraction of a second later for a profit. That’s not market making and you know it. Now, this activity may not be traditional front running and may not be technically illegal, but it IS front running nonetheless and it disadvantages the real market.
Your example has Warren making a public statement. The market then is free to react on that information. That’s completely different than Warren calling up his broker, his broker putting in the trade, HFC traders seeing the order and front running it. These are two completely different things.
BTW, I’m going to see Michael Lewis in Seattle on Monday. Really looking forward to it. When I first started in the business, Liars Poker had literally just been published, and we (Swiss Bank Corp) had boxes and boxes of Liar’s Poker book on the trading floor in Tokyo and sent a copy to every Solomon Brothers customer we had, and then every other customer. That book was instrumental in getting me kick started in the biz.
How significant are the effects of HFT on the returns of indexed mutual funds? I can understand how HFT would siphon off profits of actively managed funds over the course of the many trades made. But indexed funds make far fewer trades. They also hold the stocks longer, which would seem to mitigate the effects of HFT skimming over time.
Source: Jack Bogle: Michael Lewis is wrong about rigged markets
Source: Vanguard CIO: High-Frequency Trading Cuts Costs
Again, I completely agree that there are some bad practices and bad actors. I vehemently disagree with the assertion they represent the majority of the HFT community. The hyperbole surrounding the issue is ridiculous.
There are very specific issues that need to be looked at: Rule 610 and 611 of Reg NMS, modernization of the SIP, “trade at” rules, sale of order flow/broker internalization, etc. Each of these need to be rationally and thoughtfully addressed. Knee jerk action based on a pop culture book is not the right way forward.
If you change the definition of front running, then yes, it’s front running. I don’t think that will hold up in court, though.
I agree that knee jerk reactions are not helpful, but I think people are misrepresenting the issue to some extent. Having not read the book, I cannot comment on the tone of the book specifically, but a great deal of Lewis’s work confronts financial issues based on social norms rather than business/market norms. So while I have been mostly convinced that HFT isn’t the scourge it’s being made out to be by some in a strict financial sense, it does basically seem “unfair” in terms of social norms. I get that many disagree on basic facts, but I think a lot of the outrage comes from laymen who just simply object to someone making money because their computer is faster, or because they trade at a location physically closer to the an exchange (even if that practice saves them money).
That objection is perhaps a bit unfair, but it’s similar to the rage people feel when Uber does seemingly unjustified 9x price surges, or when people price gouge during a disaster. Even if both practices can be justified based on market norms, people just don’t like other people enriching themselves based on circumstance and not merit. To argue that they are wrong because HFT makes the market more efficient is kinda missing the point to some extent.
I saw Michael Lewis a couple of hours ago in Seattle. Actually, it was pretty good but not earth shattering. A talk by Michael with questions from some lawyer from a firm that has been involved with SEC stuff. Turns out the lawyer was also the Outward Bound leader from 1980 when Michael did an Outward Bound thing for 3 weeks in the 3 Sisters Peaks wilderness area in Oregon. That was kinda cool. Had some photos of Michael and his Outward Bound group taken by a group member that’s a professor in Texas that uses Michael’s stock market books in his classes. They hadn’t seen each other since Outwward Bound in 1980, and seemed like Michael hadn’t seen the photos before. So, completely different take.
I went with a guy I knew in Taiwan more than 25 years ago. He has been in research or fund manager for about 25 years. I worked in UBS Tokyo, UBS HK, Lehman’s HK and Nikko Securities HK in the 90’s. The two of us were colleagues for a while at UBS (strictly speaking at Swiss Bank before they took over UBS). He’s still a fund manager at a company with about $4B in assets. As we chatted:
I haven’t read the book yet but only the excerpt. Michael talked about the ending. The person advising the SEC on HFT, who is a HFC pundit on the financial news networks, gives the message that “it’s not about speed” is the person responsible for the microwave tower transmission set up between Chicago futures exchange and the New Jersey exchanges. Talk about talking ones own book.
Trom - I’m curious as to how you honestly think HFC isn’t front running in essence if not in definition? HFC get exchange information in advance of what everyone else gets, and can act on that information. In other words, using the actual pricing while the vast majority of the market is trading on delayed pricing. This is not an unfair advantage? (Maybe not illegal but as Michael Lewis said it should be.) I’m just not seeing where what HFC do is advantageous to the market today?
brickbacon - financial markets should be transparent at least instead of faking fairness. IEX is a good market solution to BATS and the other exchanges that sell their deal flow and access to the HFT. Eg, creating an arms race to “fair” exchnages.
Tonight, Michael told the story that during the MSNBC broadcast, much of the NYSE “traders” stopped working to watch the BATS Chairman argue with the IEX founder. A Goldman partner asked “we own shares in BATs?”
“yes”
“We don’t own shares in IEX”
“No”
“we’re fucked”
Lessee, another good one was Michael talking about how he’s been poking the Wall Street monster several times starting with Liar’s Poker. “This time I poked and got a reaction. It was more like I kicked wall street in the balls.” hearty laughter ensued.
Oh, and BATS had to correct the Presidents comments during his frenzied MSNBC debate that captivated many of the NYSE members. See on report here
"Days after Bats Global Markets Inc.’s president debated author Michael Lewis on whether the U.S. stock market is rigged, Bats corrected one of the executive’s assertions.
Bats said yesterday that two of its stock exchanges, called EDGA and EDGX, use slower data feeds to price transactions. During the April 1 debate on CNBC, President Bill O’Brien said those markets use the faster direct feeds offered by rival market operators. Bats issued the correction under pressure from New York Attorney General Eric Schneiderman, the Wall Street Journal reported."
I am reading the Michael Lewis book : Flash Boys and I’m surprised it hasn’t generated a deeper discussion on SD. This stuff is fundamental to all off us who save for retirement and who trust fund managers who act in our best interests.
All of us and all of them are being front run. Individually the loss/price/tax is trivial but it all mounts up.
If a high frequency trader can gain in one day a profit of $29,000, that is similar to the average American’s annual income. But in one day.
HFT may be currently lawful but I can see no reason for it to exist and the ethos is fundamentally wrong.
I’m surprised there’s no mention of unicorns, dragons and ghosts in that sentence, it would have been fitting.
If you want to pay somebody else to play with your money, I’ll give you the address you can send a check to.
I can spend my money just fine by myself, thank you!
Have you seen “The Wolf Of Wallstreet”?
If you’re doing trading on your computer don’t ever setup a automatic “sell” on a drop or dip, they purposely glitch or dip the price to have the auto’s sell and you lose.
Really? You don’t expect other people to be trustworthy?
I am a lawyer in a small firm. We control $2 million of our clients funds. Every cent is accounted for. We make no money from these funds.
So, you’re some sort of philanthropic investment broker? Never heard of that before. Explain to me how that works.
No, we invest the money at a slightly higher bank rate (because of volume) than individuals can themselves. We are lawyers not financiers. Our professional duty is to protect our clients and provide legal advice. The holding of money is just an extra service which most lawyers in NZ provide. Some charge a small commission on the interest but we don’t.