It's worth remembering that HFTs like yourself define front-running differently than others.
Others often (rightfully) feel that HFTs who engage in latency arbitrage where they take advantage that everyone else is using the NBBO (because they have to), and the NBBO is lagged, are front-running assholes who extract value without creating anything.
And we refer to that thieving, predatory, value-stealing activity as 'front-running', even though technically you're engaging in a slightly different activity.
Well, except in the industry, front-running has a precise regulatory definition.
It doesn't help the conversation to start using the name of a crime to describe something that's legal but you don't like (even if you think it should be illegal, but agree it doesn't fit the legal definition of the named crime).
I don't like that back when rape and pillage on the high seas was a large threat, some copyright holders were able to convince people to start calling copyright infringement "piracy". I don't like our current tendency to over-label things as terrorism or exaggerate the role of narcotics smuggling in financing Islamic terrorism. I also don't like labeling reacting quickly to public information and reacting to expected orders as front-running. I think it's a cheap trick that harms the quality of the dialogue.
I hope you understand that the thievery has been happening for centuries, millennia. There is no other way to gauge real supply and demand than to put buy and sell orders into the market yourself. HFT is doing at ultra-high speed what human market makers do all day long, and have been doing forever.
Now, possibly rightly, market makers in general, through the ages, have had a bad rap. They are indeed trying to get more information than the average joe, with very clever, and risky, techniques (see below) and skimming him after having done so. Nevertheless, you must remember, that without these people/machines taking these risks, you would not have a continuous market in which to trade. You'd have a much more stepwise price action and much more risk. They're providing s service.
Perhaps most controversially, being a good market maker means having some capital, so that you can wear a loss which is entirely possible during your price discovery. Thus, market makers who make money, inevitably already have money. This doesn't help their cause.
But the idea that HFT per se is the problem is wrong. If you don't like HFT, you don't like finance, period. That may be a legitimate view, or not, but the two are inextricable. They are not different one from the other - HFT is simply Amazon doing what Barnes and Noble does, more efficiently (without the monopoly aspects - HFT is fiercely competitive).
I agree. I've always thought of HFT as a way to let liquidity flow between exchanges, with a payoff equal to the degree to which the inter-exchange spread has been decreased. If the inter-exchange spread is wide, there is some value to be extracted from that spread, and HFT provides the (in my opinion) valuable service of extracting that value, making the market more efficient as a whole. The more people that are competing in that market, the smaller the value the HFTs can extract, until the actual market participants on the exchanges are only paying fractions of a penny for the privilege of buying shares "originating" from another market that has higher liquidity. I can't really see how this could be a bad thing (given enough competition).
For the incredibly small minority of people who can engage in it, and who enjoy special rules, maybe. For the majority of the people who's money is actually extracted by this system, it's an exclusive club.
> Without HFT, bid offers would be wider. Fact.
The majority of people who just want to save for retirement would prefer wider bid offers instead of having such a large chunk of money extracted from their future bank accounts. Fact.
The other reason why HFT is non-competitive is that you cannot go and start a market with your own rules without being deeply in bed with the government and the financial status quo. HFT is forced down our throats by a system that calls itself capitalistic but thrives on enjoying custom-made loopholes in heavily-regulated statism.
At what point in the history of the public markets in the United States was market-making of any sort not an activity reserved for an incredibly small minority?
The difference, from what I can tell, between the HFT "elite" and the human market-maker "elite" is that the human elite actively colluded to retain their status. Compare the largest HFT firms to the largest investment bank, and the number of entrances and exits in the market for electronic trading firs.
There are market makers, and there are Market Makers. In practice, the registration may simply be a formalization of an existing trading system, or a very light obligation on top of the existing system.
From the document that you listed, it looks like NYSE Arca has a requirement for 100% continuous quoting, but the quotes can be 8% away from the current market price (section 7.23.a.1). This is basically a free pass; nobody wants to trade against a quote that wide. For reference, take the most liquid ETF: SPY trades above $150 and regularly has a $0.02 spread, one THOUSAND times tighter than the 8% requirement.
On other exchanges, there are requirements for tight quotes, but they usually come with relaxed requirements on quoted time. For instance, maybe a market maker could be required to quote "90% of the time within a 0.5% spread". In such a scenario, allowing market makers to pull quotes for 10% of the day is basically giving them a free pass on the most volatile points of a day.
I have seen very few situations where registered/designated Market Makers are obligated to suicide themselves to provide liquidity; there's usually an "out". In practice, the top-tier HFT market makers (de-facto) are already exceeding the obligations required of Market Makers (registered).
Retirement savers are not churning their portfolios and are thus not paying anything to HFT. Not a strong argument.
Making money making markets takes risk capital. i.e. Money. The money makes more money. Fact. I agree. But don't blame HFT. Blame finance. That is how finance works. I see a completely legitimate case for being anti-finance. I don't see a legitimate case for being anti-HFT only. Indeed, the opposite, if HFT reduces the bid/offer paid by the average retail investor. Which it does. Fact.
Do you know who hates HFT even more than the general public? Human market makers. I think that says more than any of my arguments.
Retirement savers are losing a cut of every paycheck to HFT when they go and add to their account. Likely multiple cuts if they've diversified. It's basically a tax you pay for not having the best access to the fastest server closest to the database.
HFT on average narrows the bid offer. Retail (i.e. small) investors benefit. Human market makers lose out. Without HFT your little old lady retirement angel would be paying much more to a rapacious human market maker.
The point is that it is not the end users who are getting hurt. It's the old monopoly - the human market makers.
It's not a tax, it's the price of immediacy. You can either work your orders yourself (which doesn't in the least require speed), or you can pay a concession. It has always been this way and always will. HFT has made that concession the lowest it has ever been for the vast majority of market participants.
If we're going to arbitrarily redefine terms, why not go with carpet-bagging? Or baby-mulching? Think how many more people would join you in opposition to "baby-mulching HFT".
Others often (rightfully) feel that HFTs who engage in latency arbitrage where they take advantage that everyone else is using the NBBO (because they have to), and the NBBO is lagged, are front-running assholes who extract value without creating anything.
And we refer to that thieving, predatory, value-stealing activity as 'front-running', even though technically you're engaging in a slightly different activity.