Ex. 3: Front Running

Small HFT firms make their profits by buying available securities and reselling them at a price only a few cents above the price they bought the security. They may only profit $0.01 per share or even less, but they trade in such a large volume, they will make consistent profits. They are able to do this because they see the price changes before brokers at large banks and they have the advantage to buy at a lower price then resell to brokers to meet their demand. This process is known as “front running” and HFT use this method to make money. There is a big difference between the information at HFT firms and large banks, “The numbers on the screens of the professional traders, the ticker tape running across the bottom on the CNBC screen was an illusion” (Lewis, 2014, p. 40). Brokers wanted to execute trades at prices that were not accurate and it would cost them billions every year that could have been in the pockets of investors rather than HFT firms.

A divide emerged between large banks and HFT firms because of the difference in speed of their data.  They both have the same software and computers, so it is expected they would be competitively equal, but “this is wrong because inequalities in other types of access will come to fore” (Van Dijk, 2006, p. 180). Van Dijk is correct with this assumption because there is varying speeds of data flow that result in different firms seeing prices at different times. Those firms that see data first have the opportunity to make the trade before other firms. This opportunity gives them the chance to make a small profit from this opportunity and they sustain their firm because of their speed advantage. It is an unfair advantage given to these firms, but this is how they profit. It is extremely important to their firms and they are competing for space as close to the exchange servers as possible to ensure that they see market information as close to real time as possible.