The Problem of HFT

Haim Bodek ran an electronic trading firm and became a whistleblower on exchange practices, and this short collection of his writing sets out his account of how high-frequency trading firms obtained systematic advantages in American equity markets.

His central claim concerns order types. Exchanges offer a large number of order types with different behaviours regarding price sliding, repricing, queue position and interaction with the national best bid and offer. Bodek argues that certain order types were designed in consultation with high-frequency firms specifically to give their orders queue priority and to avoid the disadvantages that ordinary limit orders face, and that these order types were not documented in a way that other participants could understand or use. His own firm's performance deteriorated when it did not use them and recovered when it did, which is how he identified the problem.

He also covers the maker-taker fee structure, in which exchanges pay rebates for providing liquidity and charge for taking it, and argues that this creates order routing incentives unrelated to execution quality. He filed complaints with the Securities and Exchange Commission and several exchanges were subsequently fined for failing to disclose order type behaviour. The book is short, technical and written by an interested party who was harmed by the practices. It assumes knowledge of market microstructure and is not an introduction to the subject.