Order Priority, Payment for Order Flow, and HFT Execution

# What are the unfair order execution/routing advantages HFT firms apparently have?


# What are the unfair order execution/routing advantages HFT firms apparently have?












I originally thought that you have an orderbook per stock and orders would be filled on the time at which they arrive. Arrive first and you get the best price and the qty in the orderbook is reduced by however large the first order was. Second order arrives, that gets the next best price etc.

However, I keep hearing/reading this isn't the case and HFT players in particular get an unfair advantage on order routing/orderbook filling.

Could somebody please explain what are these unfair order execution techniques? I am surprised how anything but first-order-gets-filled-first could be legal.

## Answer by madilyn (score 5)

https://quant.stackexchange.com/a/12836

I have heard of several allegations in the recent days, but they are mostly baseless.

However, there are a rare, few trading venues whose matching rules are most often accused of giving unfair order execution advantages to certain firms. These usually arise from violations of the standard price-time priority:

- IEX's broker priority rule. "All orders will be matched according to price-broker-time priority." This disadvantages orders with non-broker status.

- NYSE and NYSE MKT's parity rules. These benefit DMMs and floor brokers, retaining the character and spirit of the NYSE specialist privileges.

Finally, the practice of payment for order flow has also received strong criticism for giving certain firms unfair advantages. It must be noted however that it's a common mistake to identify an order flow internalizer as a "HFT" firm. The leading order flow internalizers (e.g. Wolverine, Morgan Stanley, Citi, UBS) are not conventionally known as "HFT" firms.

## Answer by em70 (score 3)

https://quant.stackexchange.com/a/12851

In addition to @madilyn's answer, there is one point that needs to be addressed and that is often called an unfair advantage although it is merely a competitive advantage.

Take the US Equities market. There are now several venues on which the same symbols are traded. If one HFT acquires information about one symbol in one venue - e.g. due to a limit order being filled - it might try to act upon that information very quickly on the other venues on which it is also active. That may result in surprising behavior to people with little knowledge of market microstructure. For instance, quotes on other venues may be cancelled before every chunk of a single order sent to a broker (and naïvely routed) has reached its venue, resulting in partial fills or slippage.

HFT firms pay dearly for connectivity and colocation and work on very tight profit margins. In return, they get the possibility of making more efficient use of new information than most other market participants. If you take speed away, the vast majority of venues (and the most active ones) do not offer any particular advantage to an HFT than to any other participant. As for speed, it is a matter of access like in any other field, and criticizing HFTs because of that is like arguing that floor traders had an unfair advantage in the days when pit trading was the only way to trade actively. There is a service being provided, people investing time and money to do that, competition driving profits down and costs up. Nothing unfair to it, really.

## Answer by experquisite (score 0)

https://quant.stackexchange.com/a/12926

Haim Bodek wrote a lot of research, not all those order types still exist, but it's a fascinating read:

http://haimbodek.com/research.html