What are algos actually doing?

Quote from mastertrader456:

I am guessing Getco or Tradebot. Its from a WSJ article but didn't specify the firm.
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Here's what WSJ reported on the rebates:

The flow of rebate payments is an area of interest in the BATS inquiry, say people familiar with the matter.

According to a regulatory filing tied to its IPO, BATS in 2009 paid 51% of such rebates to a single firm, which it described as "an affiliate of one of our strategic investors." The filing doesn't give the firm's name.

http://online.wsj.com/article/BT-CO-20120403-715981.html
 
Quote from mastertrader456:

...These arbitrageurs as market participants, who are able to know that an order will move the NBBO into a certain direction, before this fact is reflected by the NBBO (because it takes time to discern the
NBBO). Based on this knowledge, they trade against any existing liquidity at the (stale) price which is still being displayed and offer these securities to the trader who initially caused the move in the NBBO...
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This doesn't make any sense.

If price has changed but NBBO has not updated yet, then there is NO stale liquidity to match against.

Step 1: Collect underpants.

Step 2: HFT.

Step 3: Profit.
 
----According to a regulatory filing tied to its IPO, BATS in 2009 paid 51% of such rebates to a single firm, which it described as "an affiliate of one of our strategic investors." The filing doesn't give the firm's name.-----

nice and simple scheme..
 
Quote from Rationalize:

This doesn't make any sense.

If price has changed but NBBO has not updated yet, then there is NO stale liquidity to match against.

Step 1: Collect underpants.

Step 2: HFT.

Step 3: Profit.
More...

This is easier to understand for a trader with experience prior to Reg NMS implementation. Before Reg NMS crossed and locked markets existed. You would often see a bid crossing the offer. There would be a bid on INET for 20.20 while there was an offer on ARCA at 20.05. It was a free 15cents. You had to understand the different exchanges and order routes. Orders didnt route between exchanges. Latency was huge back then.

Point being there isnt a centralized market. BATS has servers in Chicago and New Jersey. NYSE servers in New York. Nasdaq servers in New Jersey. So your buy order on BATS first goes to Chicago before its routed out to NBBO. If the best price is on NYSE then the order must travel to NYSE servers. Your order goes from you to chicago to new york. So all the HFT algo servers that are located in Chicago have full knowledge of this order before it hits New York and the NBBO has changed. They can trade on that information. So it can scan all possible liquidity to trade ahead of that order. There may be liquidity at various price points on other exchanges or dark pools not protected by NBBO.

If you can grasp the concept that orders have to route and bounce around various distances to be filled then you can see how this takes time albeit milliseconds. Hence latency arbitrage.

Below is a link that explains all this in much more detail. Its from an earlier post.

http://www.frankfurt-main-finance.de/de/finanzplatz/daten-studien/studien/High-Frequency-Trading.pdf
 
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