Pondering The HFT Marketplace System

There has been so much talk about the dangers of HFT Systems.
The legal nature of HFT systems.
The complexity of HFT Systems.

Its HFT obsessively all day long.

Lets start out with that fact that there are many different types of HFT systems out there. There are a lot of smart people programming at financial institutions every single day to get an edge. Its all about low latency and how I can quickly in micro-milliseconds execute trades ahead of not only my customer but the competition.

Lets start out with the different types of HFT Trading Mechanisms. There are 3 main types, all have different variables but generally can be explained as follows.

Correlation HFT Systems

These Program Systems constantly look across different market sectors to determine if a transaction in one security/sector/type should be reflected in other parts of the same sector. If there are huge blocks of Intel (INTC) trading on the offer (BUYERS), the HFT System is configured/programmed to find other semiconductor stocks like Broadcom, Altera, Microchip, National Semi, etc and buy them as well. Its really basket trading done on micro millisecond increments. As you can see with the advent of Sector/Leveraged ETF's, what type of volatility is inherent here.

This type of trading is a pure "Arms Race" material - Cold War Style. Who ever has the fastest, smartest, flexible, scalable, and most complex system wins. Whoever has the best mathematical program wins. Guess who that is? GOLDMAN SACHS. But Citigroup, Morgan Stanley, Citadel, and others are involved here as well.

Momentum HFT Systems

These guys try to quickly figure out what is happening in the market via Correlation/Dark Pool HFT systems and move to join the party. They use leverage to load up on stocks. The biggest players here are the quant/stat arb hedge funds. Most of these guys trade at different intervals of the day. Mostly at the end of the day. Something called "Painting The Tape".

Dark Pool HFT Systems

Currently the most favored and widely used of the HFT Systems. These bandits look for whats called hidden liquidity. These systems only trade to get rebates back from the exchanges. This is also where the term "Flash Orders" come into play. These systems allow traders to get a look into the order before it hits the market. Depending on the specific Dark Pool they allow between 1-3 milliseconds for certain players to see the order before the general market does. Contrary to what people think, Dark Pools don't add liquidity to markets or even better executions. Knight and Citadel Derivatives play in this sand box, although Goldman is a player as well.

Its this particular HFT system that I find to be illegal. It effectively does the following:

It allow the market maker to peer into the order. I know that if I can see part of the order, I can take advantage of the market and move my quotes accordingly and effectively.

This is called Front Running.

tradersutra.blogspot.com/2009/08/how-wall-street-rolls-part-1-front.html

tradersutra.blogspot.com/2009/08/how-wall-street-rolls-continuing-series.html

Don't let anyone convince you any differently. This is 100% market manipulation.