Actually, the exchanges are REQUIRED to split up your order, if the bid/offer is better on another exchange.

Example: NYSE order book

100,000 shares offered $10.02

100,000 shares offered $10.00 (quote)

NASDAQ order book

100,000 shares offered $10.01 (quote)

You send a "buy 200,000 shares $10.02 limit" order to the NYSE.

The NYSE is REQUIRED to route 100,000 shares away to NASDAQ@$10.01, rather than filling the extra 100,000 at $10.02.

An HFT intercepts the trade, buys the 100,000 at NASDAQ @$10.01 ahead of you, and also can buy the 100,000@$10.02 at NYSE ahead of you. Now you have to pay $10.03 to buy the remaining 100,000 shares.

Please explain how My. HFT "intercepts" the trade in this case? How does he know your limit price? How does he know your parent quantity?

Imagine an alternate scenario: You send an order "buy 100,000 shares $10.00 limit" to NYSE. Does the HFT spend $4MM buying up 200k on the off chance that you want more than the 100k you already bought? If not, why?

The feed the HFT gets is faster than the NYSE to NASDAQ feed. That lets them trade ahead of you.

You placed an ordinary 200,000 share limit order. You didn't use one of the special order types.

It is riskless for the HFT to buy 100,000 from NASDAQ, knowing they can sell back to you when you buy the other half of your order. Other algos, seeing a big buy, move up the price, so the HFT (may) be able to safely buy and then sell to them.

> The feed the HFT gets is faster than the NYSE to NASDAQ feed.

Assuming for the moment that someone can see an execution from NYSE and route an order to NASDAQ in response in less time than NYSE can send their own order to that Exchange you haven't answered the rest of the question.

How does the HFT even know there is an order in-flight to NASDAQ? How does the HFT know that the buyer is willing to pay $10.02?

> You placed an ordinary 200,000 share limit order. You didn't use one of the special order types.

Is this supposed to be an answer? 100k executed at NYSE @ $10.00, this is public information. NYSE routed the other 100k to NASDAQ. Are you saying there is some way for Mr. HFT to know the particulars of that order to NASDAQ?

> knowing they can sell back to you when you buy the other half of your order.

You seem to be under the impression that at some point along the line someone besides the NUSE is seeing the parent order details (buy 200k @ $10.02). Please explain how you believe this information is transmitted to third parties.

The HFTs get to see the list of orders as they come in. That's the advantage of colocating with the exchange.

If a 200,000 share limit order is placed at the NYSE, the HFTs know that regulation NMS requires the NYSE to route shares to the BBO on other exchanges, before filling the order from their own book.

>The HFTs get to see the list of orders as they come in.

No, they don't. Third parties cannot see orders "as they come in". Only orders displayed in the exchange's book and executions already completed are sent out to data consumers.

In the example you created the 200k buy order is never displayed and as such is not visible to any other user. All an HFT can see is the 100k execution.

Again, an HFT rushing to buy in front of this order cannot know how big it actually is, nor what the limit price is and as such whatever buying is purely speculative and not a "guaranteed win".

If you believe the description is wrong, your issue is with the article.

Direct quote from article:

With Reg NMS, it essentially took x amount of available stock at one place, and made it one tenth of that x at ten different places.

If that isn't a regulation forcing large purchases to split up, then it's on you to explain why.

The most charitable interpretation of that quote is that after RegNMS, multiple trading venues became legalized. Liquidity providers then chose to spread liquidity out because it was now legal.

Here is RegNMS. Find me a place where it says liquidity must be divided between all possible exchanges: https://www.sec.gov/rules/final/34-51808.pdf

If you believe the description in the article is wrong, then as I said your problem is with the article.

Seller(s) of stock are not required to place shares on different exchanges. This is a side effect of the process of trading, as the NBBO price bounces around to different venues.

If I offer 100,000 AAPL at NBO at exchange X, and you are willing to purchase 100,000 AAPL at NBO, your buy order matches mine exactly and the transaction takes place. This is highly unlikely, of course, that an enormous stock transaction like this ($50M) will take place this way.

It's a lazy question, but what mechanism is the regulator using to score the effort of the exchange?

A related topic would be how often they take enforcement actions.