Stock Market day trading

[Trom]

(Missed the edit window)

There *is *an issue with a specific part of Regulation NMS that can allow for advantages when certain types of order routing events happen. See here (pdf), starting at page 17. If this specific regulation banning “locked markets” were removed, the advantage would disappear.

[Trom]

[quote=“Gary “Wombat” Robson, post:18, topic:561694”]

If I’m understanding this correctly, how could it not be considered insider trading?
[/QUOTE]

Insider trading involves material, non-public information about the operations of a company.

[Gary_Robson]

@Trom

Insider trading involves material, non-public information about the operations of a company.

Yes, I understand what insider trading is. Knowing in advance that a large block of stock was about to be traded would, indeed, be insider trading.

However, it’s a moot point, since further posts have debunked the “front-run.”

[Trom]

[quote=“Gary “Wombat” Robson, post:23, topic:561694”]

Yes, I understand what insider trading is. Knowing in advance that a large block of stock was about to be traded would, indeed, be insider trading.

However, it’s a moot point, since further posts have debunked the “front-run.”
[/QUOTE]

Large blocks of stock are advertised in the open markets all day, every day. Frequently these indications of trading interest will move prices. Insider trading has a very specific definition. Knowing that a large trader is looking to trade large size, and joining his side, is most definitely not insider trading.

[Gary_Robson]

@Trom

Large blocks of stock are advertised in the open markets all day, every day. Frequently these indications of trading interest will move prices. Insider trading has a very specific definition. Knowing that a large trader is looking to trade large size, and joining his side, is most definitely not insider trading.

True, but that’s not what he was talking about. He was talking about finding out that a transaction is taking place before it goes through and placing your own trade because of it. That’s like finding out that the CEO is going to exercise a bunch of stock options and sneaking in a quick trade yourself.

[dzero]

[quote=“Gary “Wombat” Robson, post:25, topic:561694”]

True, but that’s not what he was talking about. He was talking about finding out that a transaction is taking place before it goes through and placing your own trade because of it. That’s like finding out that the CEO is going to exercise a bunch of stock options and sneaking in a quick trade yourself.
[/quote]

I think so, yes. I was going to respond but I realized that I never had a good understanding of exactly how those sorts of trades were conducted. My understanding was that it gave the people with co-located servers a look at the entire order book including all stop and limit orders and the prices at which they stopped out. As far as I know, that’s not public information. I know that options will quote the open interest, but you have no idea at what prices that interest might be. You could have an option with a few thousand contracts worth of open interest and it might be trading at 30 cents a share. However the open interest could be anywhere from a few cents to slightly below whatever the last trade was. And that distribution could have a median at 25 cents, 10 cents or any other value, you just have no idea.

The thing is, I don’t know if this is really how it works. If so, then there is still some risk involved. For example, if you see a lot of buy orders that kick in at a price slightly above the market, you can get in early, ride the temporary spike the buy orders will create and then get out. However you can’t be guaranteed that those orders will kick in unless you can buy enough shares to move the market over the limit price.

I wish I could remember the details but I remember that however the info was used, it was guaranteed that you would make money. I mean, it’s no accident that Goldman Sachs and other firms have had god knows how many consecutive quarters of obscene trading profits. Yes there is some hard work that goes into it, but my impression is that most of the profit results from gaming the system in various ways.

[dzero]

OK, I did a little research and found an explanation here. However I don’t know how reliable it is.

An integral component of computerized front running is a dubious practice called “flash trades.” Flash orders are permitted by a regulatory loophole that allows exchanges to show orders to some traders ahead of others for a fee. At one time, the NYSE allowed specialists to benefit from an advance look at incoming orders; but it has now replaced that practice with a “level playing field” policy that gives all investors equal access to all price quotes. Some ATSs, however, which are hotly competing with the established exchanges for business, have adopted the use of flash trades to pull trading business away from the exchanges. An incoming order is revealed (or flashed) to a trader for a fraction of a second before being sent to the national market system. If the trader can match the best bid or offer in the system, he can then pick up that order before the rest of the market sees it.
The flash peek reveals the trade coming in but not the limit price – the maximum price at which the buyer or seller is willing to trade. This is what the HFT program figures out, and it is what gives the high-frequency trader the same sort of inside information available to the traditional market maker: he now gets to peek at the other player’s cards. That means high-frequency traders can do more than just skim hefty profits from other investors. They can actually manipulate markets.

It turns out my supposition about seeing the stop and limit prices of such orders was technically incorrect but had the right idea. I did some research and I think the guy at zerohedge.com has been the main proponent of this idea. While his market knowledge seems to be generally accepted, he does arrive at some seriously batty conclusions at times.
Anyway, from what I can gather, although the HFT traders can’t see those prices, what they can do is put in flash orders slightly above or below the market until they trigger a stop or limit order. Apparently these orders can be used to probe the open order book and the price of limits and stops. If this is true, then it gives them the same advantages of specialists and market makers.

[Trom]

@dzero

OK, I did a little research and found an explanation here. However I don’t know how reliable it is.

It turns out my supposition about seeing the stop and limit prices of such orders was technically incorrect but had the right idea. I did some research and I think the guy at zerohedge.com has been the main proponent of this idea. While his market knowledge seems to be generally accepted, he does arrive at some seriously batty conclusions at times.
Anyway, from what I can gather, although the HFT traders can’t see those prices, what they can do is put in flash orders slightly above or below the market until they trigger a stop or limit order. Apparently these orders can be used to probe the open order book and the price of limits and stops. If this is true, then it gives them the same advantages of specialists and market makers.

Please, please, please don’t read Zerohedge if you want accurate, truthful, and unbiased information - especially when it comes to HFT. They do have some useful content, but most of it is sensationalist garbage loosely based in reality.

In regards to flash trading: Flash trading and HFT are not the same thing. Again, much of the “information” floating around about flash orders is incomplete and/or misleading. Orders are flashed at the discretion of the person sending the order. You don’t want you order flashed? Easy - don’t send elect to send a flash order. Simple as that.

See herefor a non-crazy treatment of the subject.

First, let’s step back and remind ourselves what flash trading is: when you enter an order on certain exchanges, you have the option to elect to have that order “flashed” to members of that market center to give them the opportunity to match prices that may be available on other exchanges. You, as the order executor, elect to have your order flashed because if the order is executed internally, you don’t have to pay an additional charge to route your order out to another exchange. It’s that simple. Let’s make it a little more concrete: GE is trading $16.50 - $16.51, but you execute your orders on DirectEdge, and the best offer is currently on ISLD. When you enter a flash order in DirectEdge to buy 100 GE @ 16.51, all it does is give potential sellers in DirectEdge the opportunity to sell it to you at $16.51 before DirectEdge routes your order out to the other exchange. There is no theft, there is no front running, there is nothing to rant and rave about.