I don't understand why High Speed Trading is being grouped together with front running. One practice is illegal (or should be), the other offers a much needed service to the market (liquidity + arbitrage to fair value) at a small cost to traders who want to use their service. Seems like a lot of the people trying to talk about this subject don't understand the difference between these two groups.
"much needed service etc".. the "arbitrage" you mention serves ONLY the Pro high-requency traders..again at the expense of retails traders who shouldn' t even dream of arbitraging stocks, 'cause they have 3 ennemies at once: I.commissions II. (exectution)bid-ask III.speed deficiency retail investors ONLY have a chance if they catch good daily trends with favourable 2year statistics
If that were true then they would stop doing it because they would find its not profitable - just shuffling money back and forth between themselves. The fact that they are quite profitable (based on recent articles) means they are sucking out money of the system from traders who do not have the same level of data access, not from each other. Even if you are not a high speed trader you should still be concerned because the money these algo's are skimming from the market is coming from everyone else.
absolutely. let' s be clear about 1 thing: trading democracy on Wall Street is gone! GS HAS to make a profit and SURELY WILL because they essentially guarantee effective "media" policits from D.C.... so, GS will surely have hegemony as long as it' s "political function" is clear
arbitrage serves everybody. its the reason why you never see gasoline futures costing less than the oil it takes to produce it, why cross listed stocks never get priced completely differently. it ensures whatever you are paying is somewhat close to the fair value at the time. without high freq arbers you could end up paying a hell of a lot more for a stock which is listed on another unconnected exchange for less (TSX vs NYSE for example, some related derivative). they also keep the spread tighter so you arnt paying .05 cents out of the gate just to trade some AAPL. sad to see people complain about something they a) know next to nothing about b) would make the market far less efficient (more costly to trade, less 'fair') for the average day trader. a very simple analogy. imagine two retail stores across the street from each other. one is selling a pint of milk for 2$ and buying them at 1.50. the other is selling a pint of milk for 1$ and buying it at .50. without a market force to come and correct that quickly (high freq arb), unknowning customers going to the first store would be ripped off, because they would just assume 2$ is the fair value at that time of year(not to mention the first store would be paying far over fair value buying them too). an arber would come in and buy from the second store and sell to the first, driving the price closer to a fair value of 1.50-1.25 in both stores. that service benefits everybody involved.
to an extent this type of arbitrage is beneficial, yes. and I agree the market has become a lot more efficient. BUT efficient means: the lower the spread due to these "positive arb effects", the higher and quicker trade frequency, and the better "retail ripoff" opportinities because retail traders trade MORE and pros have the extra-superior execution...
what you call 'rip off' the rest of the world calls 'mark up'. its something every buyer and seller does. no one buys and sells something unless there is a little extra money to be made. the more high freq trading going on -> the more competition for the profits -> the smaller acceptable profits become for them -> the smaller the spreads become -> the smaller the 'mark up' or 'rip off' is for you. the only thing extra superior execution for the arbers does (which GREATLY benefits you personally as a retail trader). 1 ) is reduce the amount of time it takes to get a better price to you -> more profit for you. 2) the quicker they can hedge their exposer and react to changing 'fair value' of the product -> faster dissipation of changes in price over all markets -> lower risk for the arber -> the less profit they need to make to stay above water -> the tighter the spreads are -> more profit for you. i think you have it backwards. the more high freq systems means tighter spreads, meaning the less you have to pay to trade.
walter, yes indeed we' re at the core of the issue here. I am certainly not negating what you say. naturally if you regard the whole development as an "improvement in mark up", yes that' s certainly so. Makes me think of the whole retail FX world going crazy about a few ECNs who offer interbank and inside the spread dealing... tried 2, well surely not the same thing you have at a pro desk. but a good development at least in FX
i dont think you read my post. my issue is people grouping 'front running' with the term 'high freq trading'. like they did in that article. i think anyone would agree that front running should be illegal (or at least not supported), in the same way insider trading is illegal. its like writing an article for people who don't understand retail trading, and grouping the practice of 'insider trading' with all 'retail trading'. would just create a negative public opinion of all retail trading. (which you can see manifest itself in this forum with people calling for the legislative end of HFT). it would be easy to make the argument that front running and insider trading are extremely similar.