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I hate being front runned by HF traders
Old 11-19-2014, 07:30 PM   #1
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I hate being front runned by HF traders

I decide to add to my position in ISM a couple of days ago. (For the new folks its inflation indexed bond issued by student loan giant Sallie Mae, that is/was quite popular on the board).

Looking at chart over the last month, I decided to put in a limit order at $24.42 for 1,000 shares. There were only 1,150 shares/bonds traded today at price of 24.4201 or 1/100 of penny more than I was offering. So somebody got the whole order for $.10 above me argh. How come I have to put in offers at penny increments but the silly high frequency traders can beat me by 1/100 of cent..
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Old 11-19-2014, 07:59 PM   #2
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It is very unlikely that HFT was going on here, but maybe you are just jesting anyways.

Did you use Level II quotes? One can see several computer programs doing the market making for most tickers. All or none? Who is your broker?

For such a very low volume ticker, I would put in 3 separate orders of 300, 300, 400 at different limit prices. I might modify the orders up or down to fake interest in buying. I don't pay commissions, so breaking it up does not cost me more.

Maybe you will get the shares cheaper tomorrow?
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Old 11-20-2014, 02:06 AM   #3
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HF trading is more than just using high speed connections, it is also about the HF trader firms having access to score of different type order that average investor (and actually even the typical mutual fund manager) don't have. In this case I sure when they saw my order they put in an order at $.0001 higher. At my level 2 quotes it looks like the same 24.42. I'd be willing to bet that if the order was to sell 5,000 shares at the market that they would withdrawn their order let me buy at 24.42 and then bought in at lower price.

I do pay $9 commission so I don't want break up the orders if I don't have to.
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Old 11-20-2014, 06:09 AM   #4
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If it was the NFL you could throw the red flag for a challenge and upstairs review. I think you'd get the shares.
Definitely see your point, clifp.
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Old 11-20-2014, 06:59 AM   #5
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Originally Posted by clifp View Post
HF trading is more than just using high speed connections, ...
I would just call that program trading. As you know with Level II quotes, you can see your order and so can anybody else. There is nothing high frequency about it.

I think you know this, but for others reading this thread: But one can also usually see 2 or 3 computer programs placing bids and asks with less intention of having those orders go through. These are often just the market makers' computers trying to capture folks who place large volume market orders.

Here is a didactic example for low volume ticker:
Program 1 submits a buy order for 2 shares at $50 a share and the same market maker use Program 2 to submit a buy order for 300 shares at $45 a share in a thinly traded issue. Novice investor sees the bid at $50 and thinks "Wow I can sell my shares at $50" and submits market order. Novice sells 2 shares at $50 and the rest at $45. Ouch!

I would consider any order that is more than about 5% of the average daily volume to be a large volume order. So if the average daily volume is 10 shares, then 2 shares and over is a large volume order for that issue.

My recommendation is to not want to own and not to own any ticker that has an average daily volume of less than $5MM or 100,000 shares whichever is less.

But with futures down this morning before the market opens, maybe you'll get that ISM today.
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Old 11-20-2014, 08:57 AM   #6
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I can see how the HFT can get ahead of you and don't like that. But in this case I don't see why they would want to. An HFT makes money on the spread and if this is so lightly traded there's going to be no one to buy it from them at a slightly higher price. Sounds more like someone with ability to enter greater price increments just bought coincidentally.
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Old 11-20-2014, 12:50 PM   #7
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After reading Michael Lewis's book of HF trading and reading John Bogle's ideas on the subject, I have decided that I will not worry about the pennies that I will or will not lose on this aspect of investing.
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Old 11-20-2014, 08:32 PM   #8
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Buying thinly-traded stuff is always a PITA. Try again another day...
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Old 11-20-2014, 09:22 PM   #9
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The problem here is not that you got front ran, it's that mutual funds get front ran on every. Single. Trade.

This is not as big of a problem with index funds, with there low turnover, but it still rubs me the wrong way that regulators won't stop it. Crony capitalism at its finest.

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Old 11-21-2014, 12:42 AM   #10
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The problem here is not that you got front ran, it's that mutual funds get front ran on every. Single. Trade.

This is not as big of a problem with index funds, with there low turnover, but it still rubs me the wrong way that regulators won't stop it. Crony capitalism at its finest.

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Completely agree.

We had this discussion when Lewis book came out. Just be clear when I use the term HF trading firm, I am not specifically talking just about the high frequency component. Rather the large number of trading firms who provide no economic benefit but rather steal pennies by the billions which adds up to real money. I have no idea what actually happened in the trade, but I suspect that some HF trading firm was watching the order flow and when they saw a sell 1,000 shares at 24.42 they entered the buy at 24.4201 trade. Beating me out.. So economically they provide a whole dime worth of liquidity for a millisecond. I was the one who actually provide a real liquidity, I enter my order over night when bid/ask spread was a $1 or so.

I know Schwab both as corporation and every individual I've spoken with is trying to minimize the take of these parasites. Still it really is the job of the regulators to prevent people from gaming the system and they are failing fairly spectacular.

The trade happened today so in fact I wasn't actually harmed but I could have been, and yes it is only pennies. Still I think it is bad for the market as whole, when it appears like a rigged casino.
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Old 11-21-2014, 10:30 AM   #11
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Just wait till the HF firms go to lunch. Like next week on Friday about 12:30. Won't be anybody paying attention to the algo computers, they'll all be off to the Hamptons or wherever they go to obtain their jollies.

This summer we found ourselves in New York City the day before the fourth of July (it was the 3rd of July if memory serves). We went up to a major investment bank's* trading floor and checked out their live pit and the algo pit. It was almost 1 pm (markets closed early that day) and there weren't many people on either trading floor, with the algo pit being virtually empty. I guess they turned the computers off and went home. It was a little disappointing because I was hoping to see some action and instead only got to see a few hangers on watching the clock and waiting for it to strike one so they could leave.

And just remember, those algo traders are just trying to make a buck (or million) just like the rest of us schlubs.


*One of the banks mentioned in the Lewis book. Wow their cubicles are tiny in New York. What a way to eek out an existence.
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Old 11-21-2014, 10:56 AM   #12
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*One of the banks mentioned in the Lewis book. Wow their cubicles are tiny in New York. What a way to eek out an existence.
You have no idea...
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Old 11-21-2014, 11:17 AM   #13
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I see how "someone" putting in a buy order for 24.4201 will get to buy the shares ahead of you (if some offers to sell at market or below). But now he has shares he needs to sell in order to make money, right. It seems like there's no guarantee that they will sell at a higher price, right? He can't make any money selling to you. So is he counting on you upping your offer? I suspect that the answer is very apparent to you, but I know little about this kind of thing.

Edit: Wikipedia is my buddy. Both your order and his order is expected to drive the price up. If it does, he sells and he's out with cash. Your order is his insurance; if the price doesn't get pushed up, he sells to you at just a fraction of a cent loss. I wonder if you could "mess them up" by putting in a buy, then removing it, then putting it in again, then removing it. You add risk, they may flee.
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Old 11-21-2014, 12:33 PM   #14
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I see how "someone" putting in a buy order for 24.4201 will get to buy the shares ahead of you (if some offers to sell at market or below). But now he has shares he needs to sell in order to make money, right. It seems like there's no guarantee that they will sell at a higher price, right? He can't make any money selling to you. So is he counting on you upping your offer? I suspect that the answer is very apparent to you, but I know little about this kind of thing.

Edit: Wikipedia is my buddy. Both your order and his order is expected to drive the price up. If it does, he sells and he's out with cash. Your order is his insurance; if the price doesn't get pushed up, he sells to you at just a fraction of a cent loss. I wonder if you could "mess them up" by putting in a buy, then removing it, then putting it in again, then removing it. You add risk, they may flee.
There isn't just one way that the market gets gamed. As one scheme is revealed, many others morph from that. The game goes on.

Clif's initial post reminded me of a very similar situation. I don't think one can know exactly what went on. Just leaves a bad taste in your mouth. It is like trying to get the gov't to enforce the rules against people calling your cell to sell health care.

I'm glad it worked well for Clif.
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Old 11-21-2014, 02:14 PM   #15
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There isn't just one way that the market gets gamed. As one scheme is revealed, many others morph from that.
Also, keep in mind many of these programs shift approach within milliseconds if need be.

No way you can outgame them.
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Old 11-21-2014, 02:36 PM   #16
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Edit: Wikipedia is my buddy. Both your order and his order is expected to drive the price up. If it does, he sells and he's out with cash. Your order is his insurance; if the price doesn't get pushed up, he sells to you at just a fraction of a cent loss. I wonder if you could "mess them up" by putting in a buy, then removing it, then putting it in again, then removing it. You add risk, they may flee.
That is where their speed advantage comes into play. No matter what I do they can react faster. If I remove my buy order they remove theirs. Actually in all likelyhood their order doesn't actually exist accept for a few milliseconds when they see a sell order, and issue a buy order.
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Old 11-21-2014, 02:41 PM   #17
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I practice GFT (glacial frequency trading).
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