Front Running, Flash Orders, or Blackbox/Algorithmic Manipulation?

Thanks Black Diamond,

Apparently I misunderstood the problem. I agree with you on both complaints.

However, the problem related to real traders losing priority in the queue seems to be less serious than the issue of real traders frontrunned by HFT on NASDAQ. I would be totally pissed to see asks I click on getting removed before I get a piece of it just because of my order.
 
In regards to the last part of the title "Algorithmic manipulation" , I can only speak about stocks in the the Dow 30 and the sp 100 as these are the baskets and sub-baskets of stocks i monitor and in regards to algorthmic trading where baskets of buy side stocks are traded against sell side stocks , the reason you get alot of reversals in the indicies such as the Dow and S&P usually before 11:00am is that alot of baskets of stocks categorized either by sector or by there 10 and 20 day volatilities , they are hitting their 1 and 2 standard deviations areas from various algorithmic benchmarks such as their VWAP or their current day mid price . Some alogorithms are just that basic but they all react similarly in that they need to offset a certain amount of risk early in the trading day when liquidity is greatest which means trading aggresively until the basket moves too far then the algorthim switches off or the sell side basket part of the order kicks in which allows a reversion to take place . This can make the moves in the indicies look eratic but they are just computers trying to lower the overall transactions cost of the portfolio by trading pretty systematically on some days..
 
Quote from black diamond:

Tradator,

I've been doing a bit of reading about it and I see two concrete complaints and a bunch of nebulous vauge hype. But first I think you might be a bit unclear about what they are. My understanding is that they don't go in "the" book, only the book at a specific venue where they are only visible to subscribers. They are like high speed fill-or-kill orders that go out to a limited audience.

Real complaint #1 is that you can get front run if your order is flashed. This is credible but I don't think it is a problem. Flash orders are voluntary - you decide to submit a flash order you are deciding the advantages outweigh the possibility of being frontrun. You are probing a pocket of the market for liquidity without sitting there long enough to be picked off, maybe some traders think that is worth the possiblity of being frontrun.

Real complaint #2 is that it takes us further away from a national market system with a virtual consolidated order book. You can submit a limit order into the book that is first in time at that price and becomes part of the NBBO. Then a flash order that would have executed against your limit order ( if it had not been a flash)can get taken by somebody else who gets a first crack at it (at your limit price) so price/time priority is violated. This is not good but also not a unique problem. The same thing happens with block trades and something similar does (or used to?) happen with NYSE specialists, but the specialists at least had to offer price improvement to take the order. So I think not getting fills on your limit orders when your price seems to be touched by a flash order may be a valid complaint.

I haven't seen any of the other claims or complaints clearly explained. Maybe there is more to it but I have gotten too tired of reading through tons of uninformed bullshit to pick it out. I have seen some credible sounding stuff about payment for liquidity being wierd when flash orders are involved but I didn't really follow the arguments.
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No offense, but I'm not sure you have looked deep enough into the issue. I think some are using the flash order information in more complex ways. Market makers, automated or otherwise, have a huge advantage with this information. Algo's and HFT's can be set up right around the flash order information to extract a few cents from thousands of transactions per day, netting $21 Billion for GS and it's HFT customers. Also, most of the streets market makers are operated by Goldman Sach's. They control 25% of the total market volume (saw this on another post). GS also owns Direct Edge, the last holdout to not offer on it's own to ban the use of of the flash orders. The flash orders have made it an unfair cake-walk for these market makers/programs. THEY CAN SEE THE ORDER INFORMATION COMING IN ADVANCE AND REACT ANY WAY THEY WANT!! Give me the flash order info in advance and a robot that can react around it in milliseconds and you'll never see me posting on this site again. I'll be somewhere on an tropical island sipping mai tai's (Not really, because that would be illegal/unethical and a little guy like me would get in big trouble. It would also be cheating, and i'm not a cheater). GS (and others) with its' knowledge, resources, and influence on the street are already doing this. This is why a Senator and many others are pushing to abandon the practice.

I'm not talking about a fraction of a cent here or there, i'm talking about market makers or automated market makers using the info scalp several cents per transaction on decent volume stocks with maybe 3-5 cent spreads on the bid/ask. How else could you explain getting filled 3-10 cents out of the money when liquidity was apparently there? I've looked at the time and sales on several trades. No one is ever in front of my order, i'm first in line at multiple level II prices. Once the order is placed, poof, the liquidity vanishes and fills me in a nasty spread. No prints in between on the time and sales, nothing. Seems to me it has to be a market maker or program that spotted my order coming in with a "flash' and dropped all of it's bid's (or offers). A few of these type of fills a day (about 25% for me in this market) can really put a dent into all the good trading you have made for the day. If someone see's what else they think it could be, by all means, please let me know. This is the reason I originally started this post, i was looking for answers and help.

I only hope that they look further into the HFT's and algo's while this whole thing is unfolding. "Where there is smoke, there is usually fire". My gut instinct is telling me there much more unethical trading practices going on.

Black Diamond, just sit back and relax. When they abandon the practice you'll see how much easier your trading becomes. Maybe your particular trading style is not affected by the flash orders. But you may find that, at the end of the day, even your profits are a little better. Why negate a discussion, perhaps topic of change for traders like ourselves, that can only benefit you. If you ultimately had it your way, you would opt for the ban of flash orders, wouldn't you?
 
What broker are you trading with?

If YOU are not using a flash order and you take liquidity on the bid or offer, you mean to tell me it 'disappears' when you execute.

I don't believe it.

Post a real example for dissection. I assume you are trading this by hand, if not, then maybe you expect more from a black box than it can deliver.
 
Hey Pacific 7- No offense taken but I am not convinced. And I am not trying to negate any discussion, just giving my opinion. I'll assume your facts here are correct, I don't think they lead to your conclusion. If a lot of volume is done by algos and the algos make money, so what? I can say market makers on the floor do a lot of volume and make a lot of money (or used to), that in and of itself does not mean they are doing anything harmful. The fact that some politicians get excited about it doesn't prove anything either.

I don't think there is a way flash orders can take your liquidity in the example you give. I think the explanation is cancelled limit orders, and if this happens a lot in what you trade it sounds like a good reason to use a marketable limit order instead of a market order. Maybe it is reasonable to have a beef with how long limit orders have to sit there, but I don't see how you can blame it on flash orders. Your order is not getting flashed unless you are submitting a flash order. And the liquidity you are looking at is not from flash orders unless you subscribe to them and you can watch very quickly!

So here is my challenge to you: lay out a scenario step by step where flash orders could get you ripped off. Not counting when you are the flasher, I still haven't heard any good ones except "my limit order should have filled and didn't".

I am also curious how you would make a ton of money if you could see flash orders. As far as I can tell they 1) give you a chance to buy at the bid and sell at the ask out of line - nice but not the grail, and 2) frontrun the flasher, who presumably would have decided not to flash his order if he was worth frontrunning. I think the real money made from flash orders is when DirectEdge or whoever gets to fill an order internally instead of sending it out into the market. So what am I missing?

And you ask if I agree flash orders should be banned. I am kind of ambivalent. My impression is that they are not good but not terribly damaging either, and I am not a big fan of banning things for minor improvements. Especially when the people making money off them are probably smart enough to do the same thing some other way that gets around the ban. But I am open minded - if you can give me a concrete example how they are worse than I think, or point out where my facts are wrong, I may switch sides.

Quote from pacific7:

No offense, but I'm not sure you have looked deep enough into the issue. I think some are using the flash order information in more complex ways ... Give me the flash order info in advance and a robot that can react around it in milliseconds and ... I'll be somewhere on an tropical island sipping mai tai's ...

How else could you explain getting filled 3-10 cents out of the money when liquidity was apparently there? I've looked at the time and sales on several trades. No one is ever in front of my order, i'm first in line at multiple level II prices. Once the order is placed, poof, the liquidity vanishes and fills me in a nasty spread. No prints in between on the time and sales, nothing. Seems to me it has to be a market maker or program that spotted my order coming in with a "flash' and dropped all of it's bid's (or offers). A few of these type of fills a day (about 25% for me in this market) can really put a dent into all the good trading you have made for the day. If someone see's what else they think it could be, by all means, please let me know. This is the reason I originally started this post, i was looking for answers and help.

If you ultimately had it your way, you would opt for the ban of flash orders, wouldn't you?
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Quote from black diamond:

So here is my challenge to you: lay out a scenario step by step where flash orders could get you ripped off

I am also curious how you would make a ton of money if you could see flash orders.

Here's a question i sent to a great trader, which he sent me back really nice response:

Let's say I'm short 2000 shares of a stock that has fairly decent daily volume (4-5 million) and a bid/ask spread of 3-5 cents. GENZ is a good example (even though i rarely trade GENZ). I'm short the 2000 and it's bidding $48.35 by 48.38, There is several ECN's offering random offers at different sizes. NSDQ, BATS, ARCA, ISE- they are all there on the offer with anywhere from 200 shares to 2000 within a few cent range (48.38, 48.29, 40.40, etc..). I send out a market order to sell my whole position through NSDQ. Now, if NSDQ does not have 2000 available at 48.38, it's supposed to give me what it has and route out the rest at the best prices on the other available ECN's best prices. 6 months ago, before NSDQ and BATS started offering flash order info to others, i would have gotten filled fairly. I would have gotten all the best prices available on all the ECN's to complete my order and would have gotten an average price of maybe around 48.39-48.40. Today, however, with the same scenario about 25% of my trades gets filled way out of whack. I don't even get 100 shares at 48.38. I get filled anywhere from 3-10 cents out of the money, depending on the stock. I have tried everything i know of to get around it, but nothing works.

Very Important Note:

I can also send out a limit order a few cents above the offer to cover a short, or a few scent below the bid to cover a long and still get the same nasty fill. My agrument is that the flash order information gives the specialist, market maker (automated or otherwise), bigger trader the opportunity to react to their benefit. Or worse, these algo's, programs, or automated market makers are designed to spot someone that's wants out, and instantly drop it's fake level II and fill us in a vicsoius spread for it's own profit.

Also, have you tried to put out a limt order way out in advance to take some profits. I've placed them out anywhere from 5-10 minutes to a quarter of a second and some damn program or algo will step in front of me instananeouly, even if it's for a fraction of a cent. Most of the time, maybe because they way some of these algo's are designed, they can run the stock against me because it now knows i need out. All because it spotted my limit order that was NOT SENT, but sitting on my server waiting to trigger once the price hit. Once the limit price hits, boom it's flashed, and it sets off the algo or program. Some of these algo's are ECN rebate whores, so maybe that's why the step in front of me. Whatever the case, it's making things difficult and i would love to see the flash's just banned.

As far as how i could profit, that's easy. If i can see mutiple flash orders coming in for a particular stock, i could join them in that direction. I know it sounds simple or even silly, but thinks about it. That's just how simple they have made it for the market makers. We don't see it that way, because we don't think in milliseconds. The guy that set up the algo can't either, but his sophisticated computer can.

Hey, i want to thank you for joining in to this Black Diamond. I'm a pretty new trader (1 1/2 yrs full time). I originally sent out this post to get help. I'm all open ears, i know there are alot of much more experienced traders than myself onElite, just looking for answers and how i can improve.
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Quote from pacific7:

Quote from black diamond:

I can also send out a limit order a few cents above the offer to cover a short, or a few scent below the bid to cover a long and still get the same nasty fill.

Correction to that last repsonse:

I send out market orders a few cents above the offer to cover a short, or a market order a few cents below the bid to cover a long and get the same nasty fill.
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