He's technically "not lying," but many people won't notice the footnote nor appreciate the difference. All they will hear is "front-running == should be illegal"
Probably still worth pointing out, since one of the activities is illegal and harmful (uses non-public information) and the other is just reacting quickly to the public market information.
Liberately quoted:
'[...] man, remember when "front-running" meant something? [...] But then came "Flash Boys," [...] And now, basically any time anyone trades on public information before someone else, it's "front-running," [...]'
Others often (rightfully) feel that HFTs who engage in latency arbitrage where they take advantage that everyone else is using the NBBO (because they have to), and the NBBO is lagged, are front-running assholes who extract value without creating anything.
And we refer to that thieving, predatory, value-stealing activity as 'front-running', even though technically you're engaging in a slightly different activity.
It doesn't help the conversation to start using the name of a crime to describe something that's legal but you don't like (even if you think it should be illegal, but agree it doesn't fit the legal definition of the named crime).
I don't like that back when rape and pillage on the high seas was a large threat, some copyright holders were able to convince people to start calling copyright infringement "piracy". I don't like our current tendency to over-label things as terrorism or exaggerate the role of narcotics smuggling in financing Islamic terrorism. I also don't like labeling reacting quickly to public information and reacting to expected orders as front-running. I think it's a cheap trick that harms the quality of the dialogue.
Now, possibly rightly, market makers in general, through the ages, have had a bad rap. They are indeed trying to get more information than the average joe, with very clever, and risky, techniques (see below) and skimming him after having done so. Nevertheless, you must remember, that without these people/machines taking these risks, you would not have a continuous market in which to trade. You'd have a much more stepwise price action and much more risk. They're providing s service.
Perhaps most controversially, being a good market maker means having some capital, so that you can wear a loss which is entirely possible during your price discovery. Thus, market makers who make money, inevitably already have money. This doesn't help their cause.
But the idea that HFT per se is the problem is wrong. If you don't like HFT, you don't like finance, period. That may be a legitimate view, or not, but the two are inextricable. They are not different one from the other - HFT is simply Amazon doing what Barnes and Noble does, more efficiently (without the monopoly aspects - HFT is fiercely competitive).
Without HFT, bid offers would be wider. Fact.
http://libertystreeteconomics.newyorkfed.org/2015/10/the-liq...
For the incredibly small minority of people who can engage in it, and who enjoy special rules, maybe. For the majority of the people who's money is actually extracted by this system, it's an exclusive club.
> Without HFT, bid offers would be wider. Fact.
The majority of people who just want to save for retirement would prefer wider bid offers instead of having such a large chunk of money extracted from their future bank accounts. Fact.
The other reason why HFT is non-competitive is that you cannot go and start a market with your own rules without being deeply in bed with the government and the financial status quo. HFT is forced down our throats by a system that calls itself capitalistic but thrives on enjoying custom-made loopholes in heavily-regulated statism.
The difference, from what I can tell, between the HFT "elite" and the human market-maker "elite" is that the human elite actively colluded to retain their status. Compare the largest HFT firms to the largest investment bank, and the number of entrances and exits in the market for electronic trading firs.
HFT have no such obligation, and so, when there are rapid shifts in prices, may just wait out the chaos.
HFT gets the benefit of taking the spread, without having to pay the cost of ensuring orderly markets.
http://nysearcarules.nyse.com/pcx/pcxe/pcxe-rules/chp_1_1/ch...
From the document that you listed, it looks like NYSE Arca has a requirement for 100% continuous quoting, but the quotes can be 8% away from the current market price (section 7.23.a.1). This is basically a free pass; nobody wants to trade against a quote that wide. For reference, take the most liquid ETF: SPY trades above $150 and regularly has a $0.02 spread, one THOUSAND times tighter than the 8% requirement.
On other exchanges, there are requirements for tight quotes, but they usually come with relaxed requirements on quoted time. For instance, maybe a market maker could be required to quote "90% of the time within a 0.5% spread". In such a scenario, allowing market makers to pull quotes for 10% of the day is basically giving them a free pass on the most volatile points of a day.
I have seen very few situations where registered/designated Market Makers are obligated to suicide themselves to provide liquidity; there's usually an "out". In practice, the top-tier HFT market makers (de-facto) are already exceeding the obligations required of Market Makers (registered).
Making money making markets takes risk capital. i.e. Money. The money makes more money. Fact. I agree. But don't blame HFT. Blame finance. That is how finance works. I see a completely legitimate case for being anti-finance. I don't see a legitimate case for being anti-HFT only. Indeed, the opposite, if HFT reduces the bid/offer paid by the average retail investor. Which it does. Fact.
Do you know who hates HFT even more than the general public? Human market makers. I think that says more than any of my arguments.
The point is that it is not the end users who are getting hurt. It's the old monopoly - the human market makers.
DISCLAIMER: I (was) a HUMAN market maker.
Market conditions of real money players don't change in micro-seconds. For some reason this flapping of HFT strategies is a Nash equilibrium among the HFTs.
If a value trader goes and does a lot of good research on a company and then executes smart trades based upon that research they will make a profit. All well and good.
If a value trader goes and does a lot of good research on a company and executes some smart trades based upon that and their broker front runs them, a substantial portion of their profits are handed over to the broker. Not good. Value trader may not bother doing all that research in future (market for lemons; equity market becomes ever more disconnected from the real world). Broker parasitically extracted the value of value trader's real world research from them.
If a value trader goes and does a lot of good research on a company and executes some smart trades based upon that and an HFT detects the trade they're putting through and trades ahead of them using their superior speed, a substantial portion of their profits are, likewise, handed over to the HFT. Not good. Value trade probably won't bother doing all that research in future (market for lemons).
Front running is both a principal/agent problem and a market for lemons problem.
tl;dr; Joe 401k should pay more for his retirement savings because by indexing, he's freeloading on the valuable labor provided by prop traders. HFT is bad because it makes this freeloading cheaper.
(Weird to hear argument lionizing hedge fund managers and calling out workers as freeloaders coming from left wing types.)
I describe the process in a bit more detail here: https://www.chrisstucchio.com/blog/2014/fervent_defense_of_f...
This enables market makers to price discriminate between Joe 401k (who pays less) and David Einhorn (who pays more).
The article uses the term "front-running" incorrectly. Front-running is where a firm places their own trades ahead of trades they're placing for a client, to capitalize on the price movement that client order might generate. This is illegal.
What the market makers in the article are doing isn't front-running. It's just being smart with their orders.
And that's generally why HFTs cancel orders- they're reacting to market conditions that exist on the span of microseconds and will want to change their market positions very quickly- including canceling orders that they no longer think are suitable.