Slashdot Mirror
Adaptation From Flash Boys Offers Inside Look at High-Frequency Trading
Lasrick (2629253) writes "This NYT adaptation from the book provides an in-depth and infuriating look at how the stock market is rigged. Brad Katsuyama of the Royal Bank of Canada couldn't understand why stock he was trying to buy would suddenly vanish: 'Before RBC acquired this supposed state-of-the-art electronic-trading firm, Katsuyama's computers worked as he expected them to. Suddenly they didn't. It used to be that when his trading screens showed 10,000 shares of Intel offered at $22 a share, it meant that he could buy 10,000 shares of Intel for $22 a share. He had only to push a button. By the spring of 2007, however, when he pushed the button to complete a trade, the offers would vanish.' The ensuing investigation by Katsuyama led him to design a program that actually slowed down the trades. But Katsuyama's investigation revealed so much about how the system is rigged."
Last August the ACM had a whole issue on detailed technical aspects of all parts of trading. I dont recall talk a part on front-trading. But how to shave off yet another few microseconds. Fascinating.
if someone put a Lamborghini on craigslist for $1, and someone else bought it before you, your order didn't vanish... it simply can't be placed. the offer is no longer valid.
And that's also nothing at all like HFT.
It's more like one person has offered a Lamborghini on craigslist for $300,000, another has offered one on autotrader for $310,000 and a third is on eBay for $325,000. You try to buy all three of them for you client, a legally bind racing enthusiast for whom this is a one week supply. The ads have been up for three days already so you send an offer to each of the sellers confident that you can get all three. A response comes back from eBay and you buy that car for $325,000, but someone else who just happened to be watching eBay at the moment you bought it quickly buys the other two cars in the time between your initial buy and the time that your offers arrive at craigslist and autotrader.
While you are wondering what just happened two new Lamborghinis show up on eBay for $325,000 each. You sigh, buy them, and try to think of a nice way to explain to your client that $935,000 in cars just turned into $975,000 in less than a tenth of a second.
The exploit used by high frequency traders isn't the fact that they are able to buy cars before you can, it's that they can spot your orders going into the market and front run on them before they can execute.
I read the article, and I believe you have misunderstood it. When an order enters an exchange, it will be matched with any offers that are already in the system. There is no opportunity to see that order, then run ahead of it to buy shares *on that exchange* and then use them to fill that order. If you offer to buy X at $100, and there are existing offers to sell X at $100, you will be matched with them based on whatever matching rules the exchange uses. There is no legal opportunity for someone to "beat" you to those sell offers and then turn around and try to sell the shares to you at a higher price before your order has a chance to be filled. What the article talks about is working across many different exchanges, which is a different story. i.e. seeing activity on one exchange and anticipating the same activity in a different exchange before you get to it.
This posting is provided 'AS IS' without warranty of any kind, implied or otherwise.