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Setting Up Protection From HFT Predation

stock market numbersWhile the majority of high frequency trader (HFT) activity in the market is deemed as positive by many participants (such as market making, cross asset/market arbitrage, and statistical arbitrage), there are strategies that exist which are believed to be ‘predatory’ in nature.

To protect themselves, institutional investors should take steps. Here are some ways that they can protect themselves from HFT predation:

Examples of Some HFT Strategies Deemed as ‘Predatory’*





Order anticipation


Detecting and trying to trade in front of what is expected to be large trading interest by using publicly available exchange data (price, volume, bid-ask…)

Dark order signaling


Detecting and trying to trade in front of what is expected to be large trading interest by using ‘dark pinging’ strategies or by using publicly available ‘dark’ execution data

Momentum ignition


Initiating a series of order and trades in an attempt to ignite a rapid price move either up or down and incite others to trade at artificially high or low prices



Placing multiple, large orders to ‘push’ the book away, which could temporarily create artificially low or high prices that can be acted upon by incoming orders

Latency gaming


Anticipating orders via the use of speed through co-location to exploit the latency differentials caused by the geographical separation of marketplaces

Benefiting from ‘stale’ quote data


Generating orders via the use of co-location and direct data feeds to take advantage of the ‘stale’ quote data from marketplaces that use a slower data feed (Ie. the SIP in the U.S.)

Quote stuffing


Sending an unusual number of orders to trade a security and immediately cancelling them to ‘flood’ trading systems with excessive market data messages (causes latency disruptions)

Sub-penny queue jumping


Using the structure of the marketplace fees (maker/taker) to improve queue priority of passive orders

Kelly Reynolds is head trader at Hillsdale Investment Management Inc.

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