My point is that regulating this kind of trading can also damage socially useful trading activity and that's why it's unlikely to happen. There's a lot of rabble rousing about HFT in these discussions on HN (in a similar thread someone went as far as to say arbitrage was not socially useful), I thought it was worth pointing out its more complicated than "HFT IS A BIG SCAM"

I'll admit its funny to see the libertarian bastion of HN get so worked up about HFT. Free markets are all fun and games when it's Uber or AirBnB, but HFT harming retail investors seems to really hit a nerve

That's the funny thing too, retail investors are fucked beyond believe and it has nothing to do with HFT and everything to do with not having satellite pictures of walmart parking lots, etc. They trade at such an unbelievable disadvantage that it's laughable that HFT could make any difference. (Plus retailers dont move big enough blocks to get into HFT issues)

How does an HFT bot get advance knowledge of an order?

The scenario most commonly presented is something like:

1. Buyer A wants to buy 50 shares of Acme Corp.

2. The order hits Exchange A first, and Exchange A has 25 shares of Acme Corp. at $20.00 (currently the best price).

3. The order is partially filled, and then on to Exchange 2 to try to get the other 25 shares.

4. Exchange 2 also has 25 shares of Acme Corp. at $20.00 at the time the order hits Exchange 1.

5. An HFT bot saw the order hit Exchange 1, and, in the time it takes for the order to move on to Exchange 2, is able (due to having much faster access) to buy those 25 shares at Exchange 2 before the order gets there, then offer them to the buyer at $20.01.

The fact that the HFT bot was able to act in Exchange 2 with advance knowledge of an order that would arrive at but had not yet arrived at Exchange 2 is what people complain about. And, more generally, people complain that this provides no benefit to buyers or sellers; the buyer was going to buy those 25 shares, and the seller was going to sell those 25 shares, no matter what. So no additional liquidity or market-making went on, and the buyer's order likely is not filled any more quickly than it would otherwise have been.

(and several articles complain that this practice actually leads to loss of liquidity, in that orders go unfilled because HFT bots racing ahead from exchange to exchange have reduced the previously-available shares)

The workaround that's been presented is to have the actual initial order take circuitous, deliberately time-delaying routes to the exchanges in order to have it hit multiple exchanges within a short enough time that an HFT bot can't inject itself as an artifical middleman.

What you describe is called predatory trading. It will almost never occur with a half-lot order, but can occur with large orders.

Rather than repeat myself, I'll just link to a blog post I just wrote about it.

http://www.chrisstucchio.com/blog/2014/fervent_defense_of_fr...

What you describe as predatory trading is different from ubernostrum's scenario. In your predatory trading example, Little Billie trying to move a large block of shares, there are no existing orders in the book that match the entire block; so once the initial partial fill of Little Billie's order is done, he will have to change his offer for the rest of the block to move it. In this situation, yes, the predatory trader is communicating market information that might not otherwise get communicated.

In ubernostrum's example (which is also the one appearing in the OP to this thread), there are existing orders in the book that match the entire block. So the HFT in between adds nothing; the entire trade would have occurred at the original offer without him.

How does the HFT know the size of the buy order?

Alter the scenario here:

1. Buyer wants 25 shares, buys all available shares at his limit price on exchange A.

2. HFTs 1-n see the entire quote taken at Exchange A and rush to buy all available shares at that price on Exchanges B-K

3. HFTs now own a few hundred shares of Acme corp that they need to unwind.