So if the one particular strategy Lewis describes in his book -- inter-exchange arbitrage that inadvertendly beats someone's split up order -- was stopped/prevented, is that the end of it? There are many, many strategies across a million different products that HFTs run that have nothing to do with trying to "front-run" someone's order, many of them market making a product that only trade on one exchange (so no inter-exchange arbitrage to front run anyone) on products that trade an order of magnitude more dollar volume than US equities, e.g. E-mini S&P futures, US or german bond futures complex, etc. Are all HFT strategies bad, or does Michael Lewis have a hard on for this single, particular strategy? My guess is that the overwhelming majority of profits of any HFT firm do not have anything to do with the particular strategy described in his book.
One could argue that giving someone latency for money is an inherent disservice to every other investor - whatever strategy you are following, you're getting opportunities before everyone else. One approach would be to have exactly one kind of connection to an exchange with a fixed delay level that everyone has to live with. Another approach is to have a small on every kind of transaction (Edit: other claim HFT pay a small fee and I am no expert but it's clear one could decrease HFT by raising transaction fees).
The book alleges that the HFT firms actually lobbied foreign countries to open new exchanges some distance apart from their existing ones, precisely to allow for inter-exchange arbitrage.
When one exchange's offer or bid is taken out (fully traded), there is no guarantee that the same offer or bid will continue to trade on all remaining exchanges. If you took out the remaining shares on all remaining exchanges every time any one exchange's offer or bid traded out, you will lose money -- I've tested this exact strategy before.
Comments
So if the one particular strategy Lewis describes in his book -- inter-exchange arbitrage that inadvertendly beats someone's split up order -- was stopped/prevented, is that the end of it? There are many, many strategies across a million different products that HFTs run that have nothing to do with trying to "front-run" someone's order, many of them market making a product that only trade on one exchange (so no inter-exchange arbitrage to front run anyone) on products that trade an order of magnitude more dollar volume than US equities, e.g. E-mini S&P futures, US or german bond futures complex, etc. Are all HFT strategies bad, or does Michael Lewis have a hard on for this single, particular strategy? My guess is that the overwhelming majority of profits of any HFT firm do not have anything to do with the particular strategy described in his book.
Well,
One could argue that giving someone latency for money is an inherent disservice to every other investor - whatever strategy you are following, you're getting opportunities before everyone else. One approach would be to have exactly one kind of connection to an exchange with a fixed delay level that everyone has to live with. Another approach is to have a small on every kind of transaction (Edit: other claim HFT pay a small fee and I am no expert but it's clear one could decrease HFT by raising transaction fees).
IEX does neither. They introduce artificial ~350 microsecond delays on their orders, among other things.
The book alleges that the HFT firms actually lobbied foreign countries to open new exchanges some distance apart from their existing ones, precisely to allow for inter-exchange arbitrage.
What do you mean inadvertently? No way is that by accident.
When one exchange's offer or bid is taken out (fully traded), there is no guarantee that the same offer or bid will continue to trade on all remaining exchanges. If you took out the remaining shares on all remaining exchanges every time any one exchange's offer or bid traded out, you will lose money -- I've tested this exact strategy before.