Katsuyama realized that his orders traveled along fiber
optic lines and hit the closest exchange first, where high
frequency traders would get a glimpse, and then use their
speed advantage to beat him to the other 12 U.S. public
exchanges and 45 private trading venues. HFT algorithms
could then buy the shares Katsuyama wanted, and then sell
them to him at a slightly higher price. [1]
I don't know if this is illegal or not, but I'll eat my hat if anyone gets prosecuted.
What is being described in this article is latency arbitrage and is not illegal. You will notice it specifically mentions that his order was changing the price on other exchanges, not on the exchange he submitted his order to.
He was taking advantage of multiple exchanges in order to hide his order flow, because as a natural consequence of market laws large orders move prices. He is just upset that other folks were better at finding his order flow than he was at hiding it.
Could one bleed the HFTs by putting out orders in one exchange, waiting for them to buy up the shares elsewhere, and then cancelling the order? Or just waiting for the HFTs to re-sell them at the previous/lower price and buying them afterwards?
Sure. That said in most regulatory environments putting orders into a market that you have no intention of trading is illegal. Enforcement and it's impact of profitability on this sort of predatory trading is an issue.
Yeah, but what about my second suggestion, which would be to just buy from one market and then buying the rest in other markets after the HFTs had re-sold the shares?
But it's not just identifying HFT systems that need to dump shares, the idea is to induce them to. So for example, suppose the bid is $100.00 and the ask is $100.05. You put in a bid for $100.10 which causes HFT systems to buy at $100.05 expecting they'll profit $0.05/share by reselling to you in a few milliseconds, but before that you change your bid to $100.03, causing the HFTs who now need to dump those shares to have to sell to you at a loss of $0.02/share (and causing you to pick that up as profit).
This sort of HFT gaming is very common. Some of it skirts around the regulations, some of it blatantly breaks them assuming (correctly) that it is more profitable to deal with the consequences than to change the trade.
Just remember that this is happening at very fast speeds, by participants that have mind bogglingly high risk levels.
[1] http://www.reuters.com/article/2014/03/31/us-markets-hft-fla...