> without other high frequency firms being able to see a trade on one exchange, then buy and resell stock to them at a higher price on another exchange
This is a pretty common misconception of how latency arbitrage works. In reality the other HFT are not buying/selling new orders. Instead what they are doing is cancelling or modifying their existing orders so that they don't get hit by incoming orders.
HFT firms can have orders that have been resting for a very long time (days/weeks depending on the exchanges/risk rules) and you will never be able to get an order now in front of an order from last week, no matter how fast you are.
That 100% depends on the exchange actually. Not all exchanges have priority rules like that. It certainly is the case for a lot of futures markets, but definitely not for many places for Equities, Options, or even FX.
Can't really say sadly, but it is true. But it is normally the case for Limits, except not all orders are limit orders. You're right mostly, for a certain type of strategy, but not all of them. Ironically I just looked up your profile and on the link you mention Flash Boys: Not So Fast.
I used to work with Peter Kovac, that book's author, at Madison Tyler Technology / EWT LLC (which is now Virtu Financial). He's one of the smartest guys I've ever met and that was a pretty decent book.
Its been awhile since I perused order type documentation so anything is possible, but I don't ever remember seeing an order type that can jump a resting limit order from the past on any any exchange I've looked at.
I have seen odd priority rules around how orders get around sweep or self match protections and the like, but not jumping a resting, visible order.
Given the order type doco is public for SEC regulated exchanges I doubt your IP agreement restricts you from slipping me a link right? ;)
ISO limits that create a new price are usually given better priority than Hide-not-slide orders entered with the equivalent working price, even if they were accepted before the ISO limit. Depends on the exchange obviously.
Sure and the non-visible parts of icebergs end up getting later priority than new limits at the same level. I'm not arguing that there aren't order types you can do that will put you at the back of the line priority wise, I'm suggesting the alternative.
If I put a vanilla limit at a level and don't cancel it (and its GTC) today, I've never seen an order type that would allow someone to jump me in the priority queue tomorrow.
See big sell order at getting executed at $10.30, $10.20, $10.10 at Exchange A. Short sell at $10.30 on Exchange B. When the big order comes, rebuy at $10.20.
"In reality the other HFT are not buying/selling new orders. Instead what they are doing is cancelling or modifying their existing orders so that they don't get hit by incoming orders."
Right. One of the strategies is:
- Put in standing order to sell a small amount of security slightly below market and leave it active.
- Wait until a buy order triggers it.
- Buy same security faster than rest of buy order can be processed.
- Sell security just bought at higher price.
- Profit.
There are lots of variations on this, but that's the basic idea. It has the profitability of front-running, but is legal.
This strategy could work, but only on exchanges where your own private trade confirmations are faster than the public quote broadcasts, and only if you can use the information to aggressively trade a different, but highly correlated security.
> Buy same security faster than rest of buy order can be processed.
How? You can't because your competition is already resting orders there (from potentially weeks ago) and any order you put in there will be behind your competitors no matter how fast you are.
What does happen is that you all are resting orders up and down the order book. When a big order takes out several levels of your orders, you race as fast as possible to cancel those same levels at other exchanges. If you are faster than the big order you only get hit for a single exchange.
Its a risk mitigation technique, to keep your profits from your regular business of making the spread, not risk free profit.
So one place firms are racing is on the cancel side. The other is on filling back in orders after the big order has cleared levels. The faster you are there the better priority your resting orders will have (potentially weeks from now).
Would eliminating the sub-penny rule remove the need to use this strategy? If there were basically an infinite number of points orders could be resting, you could just get in an epsilon above or below some other fund's order to get ahead in the queue?
This is a pretty common misconception of how latency arbitrage works. In reality the other HFT are not buying/selling new orders. Instead what they are doing is cancelling or modifying their existing orders so that they don't get hit by incoming orders.
HFT firms can have orders that have been resting for a very long time (days/weeks depending on the exchanges/risk rules) and you will never be able to get an order now in front of an order from last week, no matter how fast you are.