High Frequency Trading or Front Running

Toma'to / tomato. Let's look at High Frequency Trading (HFT). HFT is allowing a select group to get an advanced look at trades before they are executed. Granted the timing is in milliseconds. In other words, a select few firms get a look at orders about to be fed into the system for purchases and sales. These firms, utilizing highly complex trading programs and systems can react within these half seconds to execute trades in the firms' behalf, based upon the flows, volumes direction of the market etc. So, let's say they pick up large volumes of sell orders on XYZ stock. do you think in the blink of an eye, their systems are stepping in front of all those oncoming sales with purchase orders or executing sales?

From where I come from that is referred to as front running and not legal. This is how it works from where I sit. Say I am a broker and I receive a large order from one of my clients to purchase 1,000,000 shares of a thinly traded ABC stock. Before entering that client order, I, for my personal account, buy 10,000 shares of ABC. Once I've purchased my shares I then place the order for my client. Knowing the large order will push up the price as I sit back and reap the windfall. The difference. I'm placing a few small orders looking for a big move in price to enrich myself. HFT require fractional moves in price and relies on high volumes of trades. Either way Illegal from where I sit! In the near future, James has a new address with a non too friendly and rather burly roommate. Perhaps James should have used terms like Flash Orders, and Algorithms. He probably should have upgraded from hand written trade tickets and invested heavily in his IT department and computer trading programs.

Good news for us. The new sheriffs at the SEC and NYSE are looking to pulling back the curtain and shining some light on HFT and "dark pools". If as proponents of HFT state that these rapid fire trading and dark pools actually add to the liquidity of the overall markets, how can shining a bit of light and transparency not be a good thing?

I'm sure the lobbyists up on the hill are already armed with checkbook in hand ready to do battle for the Wall Street Frat boys, so I'm not sure how much can really be changed. But, there is indeed a battle brewing and with billions in revenues at stake, the spin from both sides should be dizzying to the little investor.