The book explains that one company was running their own fiber optic cable between Chicago and New York to shave a handful of milliseconds off the latency. HFT firms also built their trading desks as close as possible to where the fiber terminated in New Jersey. This isn't the speed of your mom's google query, they were literally running up against latency caused by the speed that light travels down a cable.

Right. If you're totally unfamiliar with HFT, you don't realize how far they go to get latency down. Computers are too slow for HFT. There are trading algorithms written in VHDL and loaded into FPGAs which are looking at packets as they come in over gigabit Ethernet.[1] (That description is four years old and out of date.)

All this is really to achieve front-running, executing an order after another order has been submitted but before the first order is executed. This is betting on a sure thing. It's also illegal.

[1] http://www.wallstreetfpga.com/resources/fix-on-an-fpga/

Your understanding of what defines front running is incorrect.

Front running is when your stock broker gets an order from you but then turns around and executes an order on his own behalf before he executes yours. This is illegal because your broker has a fiduciary duty to you, his client.

It's not front running when I see an order on one exchange and then, very quickly, go make an order on a different exchange. It's not illegal because I have no fiduciary responsibility to any of the other people involved.

You have no right to execute multiple orders on different exchanges atomically.

If someone paid for order flow or fast access so they could do that, it's illegal.

If that's true, you should be able to cite a statute, an SEC/FINRA/CFTC rule, a court ruling, or an exchange rule to explain how (allowed and prohibited behavior on markets being defined by all four of those kinds of sources, frustratingly enough).

I suspect you won't be able to find any such source. Malfeasance by trading firms makes career cases for prosecutors.

That's not to say, normatively, that that's how things should be: obviously, prosecutors are not making much of a dent in the trustworthiness of big financial firms.

No. It's not.

Once orders hit the market it's public information and you can do whatever you want with it. If you can do it faster than anyone else then go you!

Can you explain in detail how an HFT would use an FPGA to "front-run" a trade? I suspect you're using that term differently than either professionals or the SEC do.

Well, it's sort of an awkward way of saying that speed can have downsides.

Of course everyone likes fast search results from Google... But how about when junk marketers want to use the same global network to fill people's email inboxes with spam? Most people have a problem with that, and so there's a constant fight against allowing spammers to "send untargeted bulk messages at nearly light speed".

I guess that's one way of looking at HFT: is it like email spam in that it hides real market signals under a layer of endless automatic noise? I have no idea. Seems like an interesting question though.

It is actually somewhat meaningful here; the trading decisions are made fast enough that speed of light is the bottleneck and companies pay to be colocated in NASDAQ data centers (paid advantage, "market efficiency"'s invisible hand will probably guide Nasdaq into setting up their next data center on the moon to make the colocated latency sell even easier). Companies also do things like set up microwave relay towers to bypass fiber lines from Chicago to New York, I don't think there are similar stories about TV remotes.

To be fair, the potential consequences of a market trade -- or even a feint at a trade, as a certain proportion of HFT trades are widely suspected to be -- can be far greater (and more difficult to predict) than those of doing a Google search, or changing the TV channel from the comfort of your sofa.

It's basic control theory. There's nothing wrong with one way speed (google or my remote), but you can get in to trouble when you have a low level control loop that runs orders of magnitude faster then the hierarchical control loops above it.

I sent this comment to HackerNews at nearly light speed! I am a god!

The point is that this sort of trading involves an algorithm making the "decision" to buy/sell/query trades at an extremely high rate. When I click "market order" on my eTrade screen it's going at nearly light speed too -- but we both know that's not the same thing and not what he meant. I think you're being a bit pedantic.