A Case Study in Regulatory Arbitrage and Information Asymmetry

While much of the public debate surrounding high frequency trading (HFT) and algorithmic trading has centred on speed, less has been said about the circumvention of regulation via special order types—complex and often non-transparent ways for high frequency traders to interact with exchange markets and other trading venues, allowing them to achieve a favourable execution position at the expense of other market participants. This chapter documents the special order types used by high frequency traders, the absence of adequate disclosure by exchanges, and the problematic interaction between order types designed to accommodate HFT strategies and the order types typically employed by public investors and agency brokers.