
Trading bots are running wild on cryptocurrency exchanges - chadmeister
https://www.bloomberg.com/news/articles/2019-04-15/-flash-boys-trading-bots-are-running-wild-on-crypto-exchanges
======
alexpetralia
_frontrunning (n): the practice by market makers of dealing on advance
information provided by their brokers and investment analysts, before their
clients have been given the information_

The prototypical example is a large investment bank hearing about a large
client buy order, then putting in a buy order first on their own book, knowing
it will go up due to the client order. It is a violation of your fiduciary
duty to the client.

~~~
Tomminn
The origin of the term is kind of comical to modern ears:

 _The terms originate from the era when stock market trades were executed via
paper carried by hand between trading desks. The routine business of hand-
carrying client orders between desks would normally proceed at a walking pace,
but a broker could literally run in front of the walking traffic to reach the
desk and execute his own personal account order immediately before a large
client order._ [1]

[1]
[https://en.wikipedia.org/wiki/Front_running](https://en.wikipedia.org/wiki/Front_running)

~~~
bigiain
Same old same old. Only these days it gets done by building data centres in
across the river New Jersey and as-the-bird-flies microwave links between New
York and London...

~~~
eismcc
Wow! Didn’t know about these “secret” microwave networks.

Eg [https://arstechnica.com/information-
technology/2016/11/priva...](https://arstechnica.com/information-
technology/2016/11/private-microwave-networks-financial-hft/)

~~~
caymanjim
They're not really secret, they're standard practice. Not all that widely
known, but that's because they're geeky trivia to most people. There are
multiple microwave relay networks between Chicago and NYC. It's neat stuff.

I've worked for an options market maker, chasing nanoseconds of latency
improvements. If you want racks in the exchange data center, you have to pay
more to be on one side of the room vs. the other, because the latency
improvement for being a couple hundred feet closer actually matters.

------
harryh
Since we're close to the topic, let's take a moment to all remember that Flash
Boys is a crappy book that gets a lot of stuff really really wrong.

Read the rebuttal!

[https://www.amazon.com/Flash-Boys-Insiders-Perspective-
High-...](https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-
Frequency-ebook/dp/B00P0QI2M2)

~~~
kristianp
Michael Lewis is a former trader himself. I find it hard to believe he could
get things that wrong.

~~~
SEJeff
Wasn't Lewis more of a pit bond trader? When I read Flash Boys, I read it with
the understanding it was kind of like reading a book from a Horse Drawn
Carriage salesmen after Henry Ford released the Model T. He has a bone to
pick, and his bias oozes into every word of the book. Are some of his problems
with electronic trading valid? Absolutely! Is he horribly biased and lets that
show in his writing to make a more "shocking" story? Absolutely!

There used to be a finite number of spots in the trading pits. If you didn't
get into the pit, you couldn't be in on the trading and potentially millions
that were made. Now the trading went from the speed of human communication to
the speed of electrons moving over fiber optics. However, instead of a limited
spot on the floor, literally anyone can buy space in exchange co-located
datacenters. You and I could chip in and buy some servers to put in the
Weehawken, NJ datacenter used for NYSE and it would be affordable. Electronic
trading brought a lot of changes, some good, and some bad, but it is arguably
more "fair" now than it has been for a very long time.

------
rb808
I'm worried about articles like this are because people want to try to
regulate crypto currencies. I really like the idea of crypto being the wild
west. If you use a cheap/crappy broker or exchange you're going to get a worse
price than if you use a good (expensive?) one. Deal with it. If you want to
deal with a heavily regulated currency use EUR/USD/JPY etc.

~~~
pavel_lishin
> _I really like the idea of crypto being the wild west._

Some people liked the idea of the wild west being the wild west. But it turned
out that a lawless frontier favored a few people over a lot of others, and
just because something is beneficial to you doesn't mean it's equally
beneficial to others, or to society at large.

~~~
trophycase
Tell that to these US "helpful regulations" that prevent me from buying what I
choose with my money.

~~~
ambicapter
Like what, a hitman?

~~~
swiley
It's inconvenient to move more than $10,000 at once.

There are good reasons to own a three necked flask other than making cocaine
(although if you are an amateur chemist and actually buy one with bitcoin I'd
be surprised if you didn't get in trouble.)

There's gray stuff like porn, although I don't necessarily support that one.

~~~
pavel_lishin
> _It 's inconvenient to move more than $10,000 at once._

I realize that this is subjective, and everyone's got their own acceptable
risk levels, but I would feel very, _very_ paranoid about trying to move $10k
via cryptocurrency. This whole thread's about the Wild Wild West, and trying
to move $10,000 in cryptocurrency is like tossing some gold bricks in your bag
and taking a hike, instead of paying Western Union to ship it - insured - via
one of their secured wagons.

(I'm also honestly not sure how convenient it is to convert $10k to bitcoin,
and then convert it back. How long does it take for it to make it through the
exchanges?)

> _although if you are an amateur chemist and actually buy one with bitcoin I
> 'd be surprised if you didn't get in trouble_

And that's the whole point I was making elsewhere in this thread. Paying for
something with Bitcoin doesn't magically make it legal.

------
mjfl
Note: they can really only "frontrun" you if you are making a _massive_ trade.
Even then, from the other side it's not really perceived as frontrunning,
rather as "getting out of the way" of a huge order that's going to change the
price. You don't want to be the one that sold them some stock for $1 that they
will immediately push to $10, which then you will have to buy back for $10, as
you are the market maker...

~~~
BubRoss
It isn't just getting out of the way. HFTs see the big order and realize it is
too big for one exchange, so they buy from the other exchanges before the rest
of the order gets there.

------
momentmaker
Coincidentally, there is a paper and talk about this called:

Flash Boys 2.0: Frontrunning, Transaction Reordering, and Consensus
Instability in Decentralized Exchanges

[https://arxiv.org/abs/1904.05234v1](https://arxiv.org/abs/1904.05234v1)
[https://www.cbspringconference.org/](https://www.cbspringconference.org/)

~~~
kbody
However, that's not quite front-running in the established sense.

That paper is about a side-effect based on the design of "Decentralized
Exchanges" on Ethereum and similar systems. That's why people should always
dive in the details of those blockchain solutions; not only you have
implementation issues, but even design issues where the "solution" falls apart
when game theory is accounted for all actors and interactions with the
network.

Unfortunately, the complexity of such "decentralized solutions" makes it easy
to miss a lot of issues. Even with audits that cost thousands of dollars per
case, you still have several cases where serious vulnerabilities go unnoticed.

------
brentis
Non issue. Of course. Just put in a limit order and be done with it. If you
are really scrapping pennies in front of steam rollers you should find another
gig because algos will eat you up.

~~~
Tomminn
There is no steamroller in this approach.

Perfectly exploited, you act as an infinitesimal holding-time middleman that
has zero probability of not being able to sell, since the future queue is
already known. You buy enough so that the real buyer has to pay the upper
limit for their limit order every time they buy.

Imperfectly exploited, you still make a very reliable, very low risk profit.

~~~
prewett
The OP was referring to the person affected by the front-running, not the
front-runners. "Picking up pennies in front of a steam-rollers" is from Taleb,
and refers to short-term traders who buy/sell a large amount on margin (or
backed by loans), and hold it for a very short period. Since the market tends
to go up on more days than it goes down, on average these guys make money
(before taxes and trading fees). The steam-roller is the black swan event, the
large, unpredictable event that will drop the price faster than you can get
out, causing you to lose more money than in the years leading up, and quite
possibly bankrupting you due to margin calls or the loans. The OP is saying
that the only way someone front-running you causes you problems is if you are
doing many short-term trades, because otherwise the percentage you lose is too
small to worry about. If the front-running loss (which is small) is a large
percentage of your gain, then you must be picking up pennies, and if you are
doing that, you are risking being flattened by Taleb's black swan
steamrollers.

~~~
Tomminn
The only way someone front running causes you actual profit margin problems is
if your profit margins rely on trading a large volume in a given time period,
yes.

This essentially means you're profiting off an understanding of volatility. As
Taleb showed, this requires care, since the standard deviation of a security
cannot be reliably quantified from historical data, yes.

But there are almost always ways to trade large volumes on a prediction of
volatility without running into Taleb's steamroller. The easiest first step is
to never write a call option on a stock you don't already own (or short sell
stocks in any other fashion). Then your losses are bounded since you can't go
below zero dollars. Then you've just got to make sure you don't bust when
you're left holding the busted security. This can be done with ordinary
bankroll management like a poker player might use. But it's also what hedging
_is for_. With hedging, you control the risk distribution of a given trade.
All you do is simultaneously make other trades that boom in the case that the
first trade busts.

------
codingslave
Any reference to flash boys is commonly an article looking for click bait. If
you look at modern HFT, most of the profits have been eaten away among the
competition, its no longer some hugely profitable industry. It is contracting.
Sure a few firms are making millions, but its really not a big deal. Its
really getting tired, most people love to get all up in arms about this, at
this point high speed trading is run of the mill.

The same will happen to cryptos. There is always early profitability because
theres no competition, but the profitability will erode.

------
infecto
I am not as familiar with the crypto trading industry but I did work in equity
markets for a number of years and for a while on short term, high volume
strategies. I still have a hard time trusting any article that uses Flash
Boys. I still find that book to be one of the worst representations of the
electronic markets. It paints this evil picture similar to a chemtrails kind
of conspiracy where a single entity is causing harm. In reality it is a
complex organism where each entity is try to gain an advantage.

Since a lot of comments are talking about the equity markets I figured I would
add my thoughts.

There is definitely a need for regulation. No we don't need to get rid of
electronic trading, frontrunners or algs but we do need to pay attention to
whats happening. I remember that window of time where the NASDAQ was selling
order information subseconds before it happened. This is bad. Or the exchange
(forgot which one) that was creating special order types for just big clients
that were unpublished, this is also illegal and was stopped.

I love frontrunning. People seem to forget the era pre computer market making
where there was a guy that made the market for a specific stock. Or how slowly
information traveled. People on the floor would know the moment something
happened and be able to trade on it right away compared to everyone else. We
had dollar size spreads. Today we have penny or even sub-penny level spreads.
Sure someone is making money off of me when I make a tread, but their margin
is A LOT less than what it once was. Is someone manipulating my
order...probably not, I am too small of a fry. Is someone manipulating
Vanguards orders, people are probably trying but I suspect based on literature
that firms like Vanguard have put out...they overall like it, cost of trades
are drastically lower than historically.

TLDR if someone has a way to trade across markets faster than the rest...thats
great, they are serving a useful job in making prices across markets even and
if they are doing it well they are earning their money for the risk and cost
associated with it.

Edit: I highly recommend the book Dark Pools. Its a much more unbiased book
about electronic markets and how they came to be. I feel that it paints a much
more realistic picture compared to Lewis' hype.

------
nodesocket
Am I wrong, but don't all the crypto "whales" know each other, and can't they
synchronize buying and selling? Essentially their bots all start buying
together, wait for retail and other bots to join the uptick and then again all
sell at the same time. Profit. Repeat.

~~~
swiley
I'm pretty sure they don't _all_ know each other unless you're referring to
fake ones used to scam users of centralized exchanges (in which case they're
the same entity.)

------
momentmaker
How is this any different from algo trading on the stock market?

I read or watched somewhere where the algo traders would skim a tiny
percentage of every transaction of mutual funds because they know exactly when
to strike.

There are lots of sharks in the muddy water...

~~~
raiyu
Algorithmic trading is about building an algo that determines how a market or
stock will move based on news, economy, other factors.

In flash boys the front-running that these quant funds are running isn't about
an algorithm, but literally all about having high capacity pipes that can see
an order come in and then fill it between different exchanges and based on the
minute differences in stock prices pocket the difference.

So an algo fund can lose money if the algorithm is incorrect. While front-
running you never lose money.

It's basically like being a tax collector.

~~~
afarah
>all about having high capacity pipes that can see an order come in

I don't understand how they can see the order come in. Is this something that
only happens in decentralized exchanges?

~~~
aianus
You can pay the NASDAQ (or any exchange) to colocate your server beside their
server with a low-latency network link and see a live feed of the orders as
they hit the book.

~~~
afarah
I know about colocation, but I was under the impression that once you see an
order in the book it is in the book. I.e. your order will be placed after it.

~~~
twic
If there are multiple exchanges trading the same (or very similar) products,
then you might be able to see an order on one, and quickly send an order to
the other one. In the US, equities trade on multiple exchanges.

------
fouc
Why would DEXes (Decentralized Exchanges) allow priority ordering by paying
higher fees? Wouldn't they be aware that enables front-running?

~~~
craze3
I'm pretty sure the author was referring to "gas" on the Ethereum blockchain.
The more you pay, the faster your transaction completes.

More info here: [https://ethereum.stackexchange.com/questions/3/what-is-
meant...](https://ethereum.stackexchange.com/questions/3/what-is-meant-by-the-
term-gas)

------
veryworried
How would one go about becoming a flash boy, if it were still feasible?

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RobLach
By design.

------
village-idiot
Financial system setup by those ideologically opposed to current regulatory
regime suffers from the same problems the current regulatory regime was
designed to mitigate. Report at 11.

------
integrate-this
Where are the people that told me that front-running is only used to describe
your actions in response to your own client's orders?

Just because you were taught not to use it in email doesn't mean that certain
forms of arbitrage are not front running.

------
rajacombinator
Anyone who is a serious participant in the crypto markets knows they are
nothing but a pure Wild West free for all. That is, like all other markets
except without the pretense of regulations that purportedly protect the little
guy. (But usually achieve the opposite.)

~~~
docker_up
The point is that it's not a free-for-all. The biggest players completely
manipulate the markets so that all the small fish end up losing to them.

~~~
village-idiot
That’s exactly what I would expect if a system was described as a “free for
all”, the strong preying on the weak.

