To make this concrete:
Say Charlie & Warren wake up one day and decide Company X is undervalued and that they want to by 5% of it. They start buying stock. In the old pre HFT days it would take a while for the market to notice all this new demand so they could get a lower price. But now HFTs are really good at noticing this so the price rises faster.
But wait you say! This is the "front-running" that Charlie is complaining about and that's bad! He's getting screwed!
But what if you were one of the people selling to Charlie. Before HFTs made the price faster you were the one getting screwed! There was all this new demand and you didn't know about it yet so you weren't getting as good of a price as you otherwise could have.
HFTs aren't front running. They just move the stock to it's true price faster than the humans doing the job before could.
If I'm buying, the HFT buys ahead of me and resells it to me at a higher price. If I'm selling, the HFT shorts ahead of me and buys from me at a lower price.
This isn't about liquidity or efficient markets, it's about gaming the system through preferential access to data and executions. It results in higher prices for buyers and lower prices for sellers.
They cannot jump ahead of you except by offering a better price.
I wrote a blog post a while back that explains the mechanics of matching engines, you might find it helpful: http://www.chrisstucchio.com/blog/2012/hft_apology.html
There was a big trade for a while where people had different account types. the CBOT matching engine, for example, had customer orders prioritized over marketmaker or firm, so customers actually COULD jump the line.
Some companies had customer accounts specifically so they could insert orders in higher priority in the queue (the tradeoff is that customers pay for CXLs, but you can just do the math to see when you should be using which account)
to @panarky of the comment, its not on the order of microseconds -- the stuff people used to rip on were flash orders, which are exactly 30 milliseconds.
So @panarky has a bit of a point about knowing the order in advance, but its still damn hard to profit from it. The narrative of just front running trades by having order information in front is just not feasible because of the bid-ask spread (the flash orders are to try to help maintain some semblance of BBO consistency across exchanges)
So as yummyfajitas says, it's not possible to sell ahead (saying "short ahead" in that way exposes you as not really knowing the trade, btw) or buy ahead in a way that necessarily affects price.
So, basically, you're paying for your own decision.
The sellers sell at their ask price (or at my bid), it's their decision to sell. If you offer to sell something to me at $10, I haven't "screwed" you just because someone else was willing to pay $11.
It absolutely is front running. Moving the price of a stock to your advantage because you know my intentions is exactly what front running is.
Incidentally, if it's acceptable for Charlie Munger to sell in such a way that others will suffer the price impact of his trade, why is it not acceptable for HFTs to do the same thing? In both cases, it's just one trader playing short term games against other traders in order to make money.
It's not uncommon at all and I've seen it happen quite openly in many situations. It's tricky business outside of the pure electronic game.
Also what does it even mean to "Move the price of a stock to your advantage" ?
That is the definition of "front running".
I'd like to see a 1 cent tax per share per transaction. That'd dramatically limit HFT.
HideNotSlide does not cause an order to "jump to the top of the order cue[sic]." It preserves your order entry time at a price that is contra the NBBO if there is not an order at Direct Edge at the NBBO (if there is an order at Direct Edge at the NBBO the incoming HideNotSlide order is filled).
I doubt "HFT" would be dramatically limited by a transaction tax. I believe that it would lower trading volume by some amount and widen the bid/ask by some amount. The number of "HFT" firms and their trading habits would look mostly the same though.
http://www.directedge.com/Portals/0/04Support/Membership/EDG...
The point is that no special license or membership is required, although you may have to do some work to implement this type of order.
Source? I believe you but I'd like to be able to quote an authority if I'm telling someone else about this. I've gotten into this HFT debate with colleagues, and I'm pretty sure none of us knew about this nifty trick.
http://online.wsj.com/news/articles/SB1000087239639044481270...