"If you walk through a physical market where 8 apple carts are lined up, all selling apples for $1, buy every apple at cart #1, then buy every apple at cart #2, and so on, would you be surprised to find the price moving up or sellers stepping away as you approached carts #7 and #8?"

If some guy had a business where his sole service was to sit in the apple cart market waiting to front run me and then immediately sell the apples right back to me, I'd be surprised and super pissed.

There's an analogue in the entertainment industry: ticket touting.

If buyers were to time divide their order and time it so the request ended up at each exchange at the exact same millisecond, would this prevent others from reacting to the big trader?

If you read "Flash Boys" by Michael Lewis, he describes the creation of the IEX, which attempts to do exactly this. RBC created a tool to try and synchronize order flow, which worked for a time. Part of the solution that IEX uses is to put large spools of fiber-optic line in between the servers to delay order flow long enough to negate the HFT systems.

Also if you read "Flash Boys" you will realize that the guys that started IEX previously worked for brokers whose central job is making sure orders get executed well and they were terrible at it. They literally did not understand basic market fundamentals that they were getting paid millions of dollars to understand. I'm not convinced I want these same guys routing my orders.

As anyone with a lick of understanding in technology has to ask, why the hell do they need big spools of fiber to negate HFT systems? Can't they implement low latency time stamping much cheaper? I suppose that a box full of computer chips won't impress big named "journalists" nearly as much as a spool of fiber though...

>As anyone with a lick of understanding in technology has to ask, why the hell do they need big spools of fiber to negate HFT systems? Can't they implement low latency time stamping much cheaper?

It's actually a quite elegant solution, and most likely cheapest: it gives you very precise, reliable, repeatable, order-preserving delay for one-time installation cost and you don't have to pay to developers, wait for software to be written and debugged and don't have to buy additional hardware!

Yes, this is what a good broker does.

Except that what's happening is that the order is against a "cart" with sufficient inventory to completely fulfill the initial order, and other actors are interrupting the transaction to add carts 2-n. Is that not the case?

I'd say its worse than that. As you reach for each apple in the cart you've chosen, someone with an empty cart runs over and grabs it just before your hand can close around it, takes it back to his own cart and marks it up a few cents.

Not for each apple. At the very worst case you get the first apple you tried to reach for. After that all further apple prices may change. Then you can reach and take another one and all further apple prices may change, etc.

You'll notice that there was a quote at exchange A and exchange B. You reached for, and got, an apple at exchange A. Now you're trying to reach for an apple at exchange B and you're surprised that it's a different price.

People are mostly pissed because the time between reaching for the apple at A and B is so fractionally small that they feel there shouldn't be a difference in price. That's really the only issue they have.

It's not the case. The trader wanted 20 000 shares, there was a combined amount of 24 800 shares, i.e. every exchange had less then 20 000.

If you stood in front of all of those carts simultaneously and said "I'll take all of your stock at the advertised price", I'm guessing you'd be a bit peeves if someone else pushed in front of you and started buying some of the stock (the equivalent of the 1,570 shared bought by some random buyer at the exact point this order was put in).

You would be peeved. Doubly so, because in the context of finance, that's actually illegal.

But the key word in your example is "simultaneously", and it's the thing that did not happen in this example. This is more like "I bought all the apples at the first cart, and by the time I got to the second card, half the carts had raised their prices, and most of the apples at the remaining parts had been bought by enterprising traders who decided there must be something special about apples all of a sudden".

It's hard to see the problem. Or the solution.

There are two possible solutions.

The first solution is to forbid multiple marketplaces for a single virtual asset. Honestly, the service provided by these marketplaces is very simple, and could be provided by a non-profit organization that is bound by law to ensure low barriers to entry. This would be a win for everybody, really.

The second solution is to enforce that markets operate on a synchronized heartbeat with sealed bid changes. It would work somewhat like this:

T=0: Bids from the last heartbeat are published; market starts accepting bids for the next heartbeat, but those bids remain sealed T=1: Market stops accepting bids T=2: Trading engine matches bids, executes orders, and publishes all bids; market starts accepting bids for the next heartbeat, but those bids remain sealed (that is, the market is now in the same state as it was at T=0)

Have one time unit be something like a minute, and force markets trading the same asset to be sufficiently synchronized.

Well, yes, those are potential solutions. But are they solutions to the problem we actually have? Indeed, what problem do we have?

Do we, in point of fact, even have a problem that needs solving? The core complaint is some unnamed institutional trader really wanted to buy a very large number of shares in one go at a very low price, while other institutional traders wanted to sell the shares at a higher price. Why are we meant to care who wins that fight?

Your second solution already exists and is called an auction. Most exchange have an auction before market open and one after market close. Some even have auctions during the day.

I think part of the problem is a disconnect between what the customer conceptually thinks is going on (a single buy request, as far as I can tell) and what is going on behind the scenes - a bunch of individual purchases being made by the broker.

If it wasn't possible for people not directly involved in those individual purchases to listen in and react to them quicker than the broker can fulfil the remaining purchases, it wouldn't be a problem. What is going on may well not actually be illegal, but as an individual trader it's not something you'd expect to be able to happen so it's definitely worth knowing about.

That is very true, but nobody is pushing through here. The trader clearly didn't send his orders to all exchanges at the same time since other traders had time to update their prices. The article talks about milliseconds when arbitraging happens in microseconds.

What you are describing isn't what happened. What happened was you stand in front of the carts and yell "I'll take all of your stock at the advertised price" but all the sellers hear you say that too so they say, "man, if you want to buy out everything we're going to raise the price on you a bit."

This isn't a perfect analogy, but it's close.

You're making the mistake of thinking that HFTers are inserting themselves between the buyers and the people offering to sell. That's not right. The HFTers ARE the ones offering to sell.