High Frequency Trading (“HFT”) operations have purchased order flow in order to trade in front of it for years. The fact that Robinhood didn’t properly disclose its practice is missing the larger issue.
This practice provides HFT operations with an enormous advantage. HFT’s powerful machines glimpse order flow and execute proprietary orders that benefit from that flow knowledge.
The practice isn’t exactly front-running. Front-running consists of a broker-dealer profiting from non-public material client information. However, HFT operations are profiting from non-public material information. The amount of order flow data that HFT operations ingest makes seemingly inconsequential bits of data material in the aggregate. This results in an unfair advantage to the HFT firm and therefore the practice ought to be banned.
Investors’ order flow should be private. It would seem to be common sense, but firms such as Robinhood and broker dealers legally sell order flow data to HFT operations. It’s time for Wall Street to make this practice illegal.