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Retail stop orders being leaked to HFT internalizer firms
The whole discussion here should not be about stops or leaks.
The underlying problem is the fragmentation of the US stock markets which is divided between innumerable exchanges and dark pools. Some HFT firms have made significant investments into technical equipment which allows them to get faster access to information than most of the other (non HFT) participants.
The HFT firms are effectively doing something that has always been a problem of the markets. They are front-running client orders and get a free lunch. This is called latency arbitrage. What a modern word for front-running! But it is still the same old wolf disguised as a modern sheep.
Latency arbitrage - or technology driven front running - is a criminal activity and should possibly be banned.
Futures trading is less affected, as the futures markets are centralized and not fragemented.
I wanted to stay away from this thread. But when a highly respected member of the forum accuses a group of people as "criminals", I fear the less-informed will just pick up the same views without doing some critical thinking on their own.
I'm afraid my views would be silenced because I have a low profile on this forum. So perhaps I should start by saying that I think I know a thing or two about this topic. I presume I have as much authority as Michael Lewis on this topic (which is not a lot), because like him, the least I can say is that I've toured several colocation facilities. Like this one:
Bear in mind that Nanex's tweet that started this thread accused KCG of running stops, which has very little to do with the fragmentation problem...
I agree that we have a harmful dose of fragmentation in the U.S. cash equities market today, and I'm more afraid this has spread to the equity options market. But this is a long topic that I honestly don't know enough about to discuss here.
What technical equipment?
The parent company of eSignal is the largest colo customer of the CME, not Virtu or KCG. Bloomberg has to be a colo customer of the CME - and so are Rithmic, Reuters and Interactive Brokers. People who use these service providers are already on the same playing field in terms of proximity. This is public information and it's enough evidence to put away a majority of the arguments that Flash Boys puts forth, so I'm surprised very few people even bother thinking 1 step further about it.
How about equipment? If you've been in a colo facility, you can look inside their cages and you'll know that firms like eSignal are mostly using equipment such as the lower 2 models in this picture:
Here's a model that firms like Virtu are using. This is all the equipment that sets them apart from the next tranche of mid-tier, "low latency trading" firms:
I happen to have both models. What no one's telling you is that they both cost around the same. I don't see any reason why using one presents a technical disadvantage over the other. Your software provider should just buy the second one if that's the case.
There's no special "technical equipment" that makes Virtu or KCG faster than all of them, really.
Let's not accuse people of being criminals because we've just read a few articles and heard from Eric Hunsader about it. That's no different from blindly following the conspiratorial prejudices that left millions of people dead in WW2.
It's just the result of honest, talented (and lucky) people who do really hard work. I say "lucky" because you don't really end up in low latency trading because you wanted to make enormous amounts of money. Most of them ended up in low latency trading because they were passionate about what they do, picked a major that isn't well-known for rolling money, and found themselves with limited career options when they finished school.
Trust me, "My work's in electronic market making" is not a sexy pickup line, not even in Chicago. If a low latency trader wanted to make more prestige and money, he or she could easily find a job in the likes of Google or Facebook.
I can name several contributors to golang, CERN's particle physics library, the Linux kernel whose day jobs are in low latency trading. Hundreds of millions of people's lives have improved because of this. These guys are not fighting back not because they're hiding some secrets, but rather they are on tight leashes from legal documents and quite frankly, would rather spend time on more productive output for society than posting colorful graphs on Twitter.
Let's not accuse people of being criminals just because we've read a few articles and heard from Eric Hunsader about it. That's no different from blindly following the conspiratorial prejudices that left millions of people dead in WW2.
First of all, let's not confound "frontrunning" (broker using private information from clients' orders and trading for their own account ahead of their client's) with "order anticipation". Many of the latency-sensitive firms are not brokers and by definition cannot "frontrun".
If we agree with your statement, we should also ban people who write "indicators", because these indicators allow a group of people to "frontrun" other people who trade on the same indicators except compute them by hand; or "semi-professional traders" who use autospreaders; or people who use an electronic front-end/DMA instead of a floor broker to trade on NYSE; or people who use IQFeed and trade via IB instead of using IB's feed to trade via IB; Goldman's prop desk that trades the same instruments as DV Trading; or a bigger hedge fund like Man Group, because they have faster software than John Doe Asset Management, a CTA that does screen trading from a beachfront home office in Peru.
Each and everyone of these people is simply paying more for a technology-driven, latency advantage over the another person who is using the similar trading indicators or strategy.
I presume you write indicators because you would agree that it's OK for retail trader to "frontrun" another, or even for 1 investment bank to "frontrun" another, for 1 hedge fund to "frontrun" another...
So what's the solution you're proposing?
(i) To segregate retail traders into their own matching tier? Exchanges into another? Investment banks into another? Isn't that worsening the fragmentation?
(ii) Artificially impose a cut-off latency like IEX? Well, Rentec and Bridgewater trade long holding periods too, and they would mop the floor with everyone at the cut-off latency. So now you want the group of people who were preoccupied with "latency arbitrage" and competing with each other to compete with retail traders at the cut-off latency instead? I guarantee you that there will be a deterministic outcome and I know who will be mopping the floor.
(iii) Consolidate the equities markets into one central marketplace? Well yes, we have this in a few awesome markets whose data license fees double every 2 years. We have a single MDP feed - and people will continue to come up with conspiracy theories about CME selling a faster feed as I see people doing so nowadays.
I want to conclude by quoting @bobwest, who has put it more succinctly than I can:
@artemiso, just FYI, your first and third images are not showing up; this is a known bug in the current version of futures.io (formerly BMT), that sometimes an image will be visible to the poster, but not to anyone else. Usually it's when a longish period of time passed between uploading the image and finalizing the post. This will not get fixed until the next version of futures.io (formerly BMT), when the underlying bulletin-board software will be replaced. Cause is not known, but for now the fix is simply to reload the images to the post in an edit. (Needs to be done within 24 hours.)
As to the issues, this is not my field and I can't add that much. My only thought in the sentence you quoted was that feelings of victimization by powerful bad actors has been around a long time (when I first started out, it was complaining about the specialists on the NYSE preying on the little guy.) I do not have any actual knowledge of the current situation, and so can only weigh the views of others, and mainly want to stay out of it. However, complaining that "they" are gunning your stops is not really new. There's always been a "they," somehow....
I tend to agree with @artemiso, and if the cash equities markets were not that fragmented it would leave less room for smart tricks around the latency and bid/ask offer in each exchange.
Let's see if we get more details but from I read so far it's only the usual conspiracy theory from Nanex.
So i keep hearing traders complain about HFT, about how its changing everything. There's a ton of posts about it all over the web, Cramer even complains about it alot. I want to know how many people really believe that trading has become difficult …
