This has been pretty thoroughly debunked. I don't really think this ever happened. There is just way too much uncertainty and risk to ever get an edge.
Remember HFT worship at the alter of the law of large numbers, meaning they get a 51% edge and ratchet up the frequency. So a typical strategy might be 48% profitable, 40% wash and 12% unprofitable.
0+ orders on the other hand, now that was a profitable strategy while it lasted:)
Would avidly read the comment adding some detail to this. :)
The book you link to in that comment (_Flash Boys: Not So Fast_) is really fantastic. It strikes me as being written in a style especially congenial to nerd message board people like me: detailed, episodic, point-by-point takedown. It's like a very long Reddit comment, and I mean that in the best way.
Long story short. RegNMS said people have to get the best price for their order. Now in a distributed system, which the US fragmented markets are, you know you can't know for cetain what hte state of the world is.
warning simplification ahead
Each market and dark pool has to trade at the price currently listed by the SIP. Now the sip is old and slow. Exchanges offer 2 prices sources,
- the SIP as legally requried
- a direct feed, which serious traders use.
The direct feed is faster, so by the time an exchange (A) reports a trade to another exchange(B) via the sip, the HFT guys who own their own microwave radio lines have notified their computers at exchange B, and moved their orders.
I was curious about microwave radio lines so I did a little digging[1]. It appears that microwave radio can double the speeds of fiber. Though the towers are limited by distance (max ~60mi separation), HFT shops buy/rent microwave tower networks connecting cities. For example, one HFT firm owns a network of ~30 microwave towers connecting NJ to IL that transmit 1.6 ms faster than fiber.
I see your point about the risk, but is there really that much activity in most stocks that getting to the top of the sell pile would be a large enough issue? As I understand some order types were more or less designed to give HFT an edge.
Although I suppose the profits to be made by any strategy dry up pretty quickly as more shops discover it, so it does make sense to me that this doesn't appear to be done any more. I mean, isn't that what worked a few months ago doesn't work any more is the only thing most people posting about HFT can agree about? :D
I have no experience in electronic trading and my knowledge of it mostly comes from HN posts and - as you guessed correctly - Flash Boys, so please forgive my ignorance
> As I understand some order types were more or less designed to give HFT an edge.
And some order types are more or less designed to give large block traders an edge.
Most of the latency game you read about is not getting to trade, its getting the opportunity to cancel your orders. A common misconception is that HFT groups are acting as middle men. They aren't. They are the counter parties on all the exchanges, they are just updating what they are offering faster than others.
Remember HFT worship at the alter of the law of large numbers, meaning they get a 51% edge and ratchet up the frequency. So a typical strategy might be 48% profitable, 40% wash and 12% unprofitable.
I took a stab at explaining why here:
https://news.ycombinator.com/item?id=9191473
If you can walk me through a situation where this works then let me know, because Michael Lewis certainly tried and failed:)
0+ orders on the other hand, now that was a profitable strategy while it lasted:)