Why a Common HFT Order-Front-Running Story Is Misleading
Summary
The document challenges a claim that a high-frequency trading bot can detect a large cryptocurrency order, infer its hidden maximum price, buy available coins first, and resell them at that limit. The answers explain that a marketable order generally executes against the resting sell orders in the limit order book, at the prices available there. A buyer’s limit sets the highest acceptable price; the account does not establish that an HFT firm can discover it by probing the order in the way described.
The responses also question the timing premise. If a trader submits several child orders, they may reach the matching engine before a bot can react to the first and alter the market against the rest. The explanation is brief and conditional: the outcome depends on order routing, exchange design, and how the orders are submitted. It gives no measurements or detailed exchange-level analysis, so it is best read as a correction to an oversimplified anecdote rather than a comprehensive account of HFT tactics or execution risk.
Key ideas
- A limit price caps what a buyer will pay but does not automatically reveal that cap to other traders.
- A marketable buy order consumes available ask liquidity in the order book.
- The claim that a bot can infer a hidden limit through rapid price probing is rejected.
- Whether a bot can react between child orders depends on their arrival and exchange processing.
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Full text
# How does a high frequency trading bot work? # How does a high frequency trading bot work? I've read this (https://cryptodaily.co.uk/2019/11/what-you-need-to-know-about-high-frequency-trading-in-the-cryptocurrency-world): > Let’s go back to your buy order of 10 BTC and imagine that it was broken down to ten 1 BTC orders. On some exchanges, traders have the ability to place a maximum price they’re willing to pay. This is something the exchange uses if the price changes very quickly and the market order fails. So, if BTC’s market price is 9,000 a trader would indicate the maximum price as 9,050 or 9,100. Let’s get to the fun part now. As you remember, your trade was broken down into ten 1 BTC orders and you indicated your maximum price as 9,100. Let’s now imagine that the first BTC was processed easily and was given to you for 9000 because it’s the market price. Once that 1 BTC is processed, the HFT server will notice the trade being made immediately. We’re talking nanoseconds here because of the co-location to the exchange’s server. It immediately identifies you as a big trader as it’s programmed to think that a large trade is just a part of an even larger one. Therefore, it will start trying to identify your maximum price. It has seen that you bought 1 BTC for 9000, so it will try something like 9500 but will fail. After failure, it will try 9400, 9300 and all the way down to 9100. Once it guesses that you’re willing to pay 9100, it buys up all of the 9000 priced BTC on the exchange’s server because it has faster access and then sells you all of them for $9100 a piece. This way, the HFT user gains a profit of around 800-900 in a millisecond, while you have to pay more for the remainder of your BTC order. Is that how it really works? if yes, how do they identify the maximum price someone is willing to pay? ## Answer by Inthematrix (score 4) https://quant.stackexchange.com/a/50384 That is entirely wrong. When you place your 10x 1BTC buy order @ 9100, you will probably taking out the ask order on the limited order book which is @ price of 9001, 9002 .... etc. And there is no way anyone can process information within a few ns. The entire article is written by someone who knows nothing about HFT and want to "impress" someone else as if he knows a lot.... ## Answer by Ezy (score 2) https://quant.stackexchange.com/a/50382 No. If you sent 10 orders for 1 btc and they all hit the matching engine then in any sane microstructure you should get your orders processed before the counter has time to process your 9 trailing orders (assuming your limit price is above the best offer) And if they can react to the first order before the others hit the gateway then they would not be able to test against your trailing orders.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.