Flash Boys is written to entertain, though, not inform. It is littered with inaccuracies and dramatization to the point of lying.

Front-running, for the record, is illegal and nobody does it. Michael Lewis perverts the phrase to mean "using publicly available information and extremely expensive- though publicly available- radio technology to move stock information faster than competitors". Which you might still think is "unfair", though I would argue it's only unfair in the same sense that WalMart and Target make it hard for small shops to compete because they can't afford ultra-efficient trillion dollar supply chains. It's not illegal, it's objectively more efficient, and the only thing that prevents anyone from "just doing it too" is capital.

"Dark Pools" by Scott Patterson is a much more educated and in-the-know look at electronic trading.

>> Front-running, for the record, is illegal I didn't get the sense that it is illegal from the book. Could you please elaborate what you understand by front running and why/how is it illegal.

>> Michael Lewis perverts the phrase to mean "using publicly available information

Per my understanding Michael Lewis is referring to the fact that HFT firms were able to race faster than the original trade executions and execute part of the trade, due to it being spread over multiple exchanges with different latencies.

While this may not be illegal, it surely sounds unethical.

> I didn't get the sense that it is illegal from the book. Could you please elaborate what you understand by front running and why/how is it illegal.

Front running involves placing a trade based on nonpublic information. It's a type of insider trading that has been going on for at least hundreds of years and it has nothing to do with HFT. The classic example is a broker placing orders ahead of their own clients in order to profit off the market's reaction to the client orders.

An HFT system placing orders based on public data feeds is not front running.

I'm not sure Michael Lewis said it was so much "unfair" as it was "nonproductive". The HFT firms weren't creating any value for the markets. They weren't making markets. They weren't helping liquidity except on paper by making every trade show up as multiple trades. At the end of the day they held zero position.

The problem is that they were basically taxing everybody who couldn't build quite as close to the physical location of the servers as they could. They were just parasites.

Every non-fraudulent profitable trade makes prices more efficient (in either time or value), and in this case it's time. Their competitors aren't you and me, and someone is going to make money from the arbitrage, so what's the big deal? The capital they spent to set up their edge just comes out of the profits that their competitors would be enjoying without them.

But HFT made the trades take longer, making them less efficient. By buying up the stocks while the trade was still in route, it cause the trade to fail and to make the brokers try it again at a higher price, wasting their time and money.

Trades get canceled/rejected because the price moves away from their limit/immediate-or-cancel order all the time, even without any HFT involvement. And the reason those orders don't get filled is because they don't reflect a competitive bid or offer for the security. I don't think you're suggesting that we should accept less-competitive orders just because the market participant took the time to submit it.

The only difference with HFT's, and market makers, and all other high-speed/high-frequency participants in the mix is that these changes in price happen more often, which indicates that price discovery is more efficient (has better granularity, recency and accuracy). (Unless the market activity doesn't have 'economic merit', which the SEC devotes a significant amount of time to investigating).

One might argue: "do we need microsecond-level granularity on the price of Amazon?"

I'll take the Matt Levine route and ask: "Do you think quotes should update once per minute? (I suspect most people will say yes). How about once a second? (Yes?) Ten times per second? (?) Every millisecond? Microsecond?"

Now ask the flip side: "Should it be illegal to perform market activity every minute? Every second? Every...?"

It's hard to draw a line with any kind of solid reasoning. As an economy, we certainly reward people who can make these sub-second adjustments with a lot of money, and in general with the stock market, where every trade is, by definition, two consenting parties agreeing on a price, usually making money means you're improving market efficiency.

Also, I want to point out that it's not like HFT's are invincible magic money-stealing boogiemen. HFT profits are declining year-over-year (look at Virtu's recent earnings numbers and their current corporate strategy/direction) specifically because other market participants are responding to their existence and getting smarter about their own order execution.

> Trades get canceled/rejected because the price moves away from their limit/immediate-or-cancel order all the time

When your trade is occasionally beaten by someone at a different brokerage (or the same brokerage) that's normal. When there is a bot on the wire doing it every time that's a problem.

The changes in the price happen more often because they are marking up the price while the trade is still in progress. This doesn't help anybody except the HFT firm. Discovery isn't more efficient because the discovery has already happened, they set the price based on what they had discovered.

HFT profits are falling because people got wise to their system and built countermeasures.

Front-running is illegal and no more integral to automated trading than fraud is to accounting.

HFT is just rapid trading. Think of trading as communication. Just as better communication allows a group of people to arrive at a more accurate consensus, faster trading allows markets to arrive at better prices. Sure, there are criminals that also profit from better communication until they are caught, but that doesn't mean we should all go back to using the pony express.

Flash Boys presented a highly-skewed view of automated trading. For a balanced perspective, I think readers of the book should also read reviews by those who are in the business of trading.