Limit Orders - HFT

[Cevian]

Something very fishy going on with limit orders and I'm not sure if this is related to HFT or not but worth understanding better if anyone has any ideas.

 

I have seen several cases of the following two different scenarios happening to me over the past few months.

 

1. Bid-Ask for a stock is 300-310, I put in a limit order for 302 and, within a millisecond, even before I almost press the button, the Bid has moved to 302.01.

 

2. Bid-Ask for a stock is 300-310. I put in a limit order for 310 and wait. Next thing I know, the price of the stock gets filled at 309.9999 without my limit order being filled.

 

Is this HFT playing with pennies?

[jawn619]

I used to work at a proprietary trading firm and this would happen to our orders all the time. The answer is yes. This happens to most lit orders in thinly traded stocks. I'll give an example of what I believe happens.

The bid/ask is 300/310.

You put in a bid for 302.

The HFT quotes 302.01.

If a seller comes in sells enough to fill both the HFT and you, the HFT gets filled and quickly sells what he bought to you for .01 loss.

If the HFT gets filled and the price rises, he is on the offer an makes the spread.

 

To be clear, this is not explicitly illegal. We used to do a version of this by hand in the old days. For example say a stock is 300 by 310 with 10,000x on the bid. We would bid 300.01 and if we got filled, wait to see the 10,000 go down to like less than 1000 and then sell to the bidder. The HFTs are doing this except much faster and smaller size.

[writser]

Exactly. That's not fishy. It is market making - has been going on for centuries. Scenario 2: do you mean a limit buy order or limit sell order?

[Cevian]

I understand market making but I didn't realize that trading could happen for 0.0001 (i.e. a hundredth of a penny?) or that the reaction between me thinking and almost pressing an order and the adjustment of the bid price to 0.01 to top my order.

[jawn619]

I understand market making but I didn't realize that trading could happen for 0.0001 (i.e. a hundredth of a penny?) or that the reaction between me thinking and almost pressing an order and the adjustment of the bid price to 0.01 to top my order.

 

HFTs aren't mind readers. When you put in your limit order, it is lit for the entire world to see. If you don't want to this to happen you can route to a dark pool... But then it would be harder for your order to get filled. Either way... The money that you lose to HFTs is insignificant in the long term, a tiny tax.

[Hielko]

1. Is not fishy, that is healthy competition on who is providing the best price.

 

2. This is fishy, but legal. It's the result of some bullshit rule that allows market makers to execute orders instead of executing them versus the order book on the exchange as long as they provide a price improvement. The price improvement is usually just 0.0001/share and allows them to front run other liquidity providers. I think this practice should be banned. This is also why brokers get paid a lot of money for (retail) order flow.

[Liberty]

HFTs aren't mind readers. When you put in your limit order, it is lit for the entire world to see. If you don't want to this to happen you can route to a dark pool... But then it would be harder for your order to get filled. Either way... The money that you lose to HFTs is insignificant in the long term, a tiny tax.

 

Some brokers sell your order data to HFT firms for them to execute. They can sometimes see your orders before they hit the public markets, or they sniff it in one exchange and race you to other exchanges and move the price on you before there's a fill. Or they use weird order types that were never meant to be executed (get cancelled) to sniff out the price and raise it on you. It's not that simple.

 

BTW, One broker that has publicly said that it isn't selling any customer data to HFTs is Interactive Brokers.