I have suspected this for quite some time.  I believe that there are HFT players that are buying order queue information from brokerage houses.  I know this sounds pretty extreme, and maybe I’m just being paranoid, but think about how easy it would be to write a program to extract this information if you could obtain it. And think about what a huge edge it would be, to be able to see the incoming orders before they are actually sent.

I dabble into the illiquid issues sometimes.  And I mean seriously illiquid issues.  The issue I was going to trade today, a preferred stock, was Entertainment Properties Trust, 9%, Series E Cumulative Convertible Preferred shares (NYSE:EPR-E).  Now that is a mouthful and it’s safe to say that the trading action on this issue is pretty muted.  That would actually be an understatement, the issue had actually traded ZERO shares today at the time I brought up this quote:

I decided to buy the 28 offer.  I queued up the order in my order montage, and clicked the price of 28 dollars (which automatically populates my order ticket with all the order information – including the 28 price).  As soon as I clicked the price (which populated my order ticket), the offer traded out, as you can see here:

Now I know it is common-place that when you send your order using a SMART router, sometimes an HFT firm will see your order coming up the queue, and quickly front-run your order by taking the offer.  But in this case, I had not even sent the order yet.  Now this could be purely coincidental, and perhaps there just happen to be some market participant placing an order to buy the issue at the exact same second that I populated my order ticket.  If I was trading a stock that was even remotely active, I wouldn’t question this coincidence at all. But considering that this issue had traded ZERO shares today, and the 28 offer had been there for over 2 hours with no takers, I find this coincidental trade to be highly suspicious.

Is it possible that an HFT firm saw my order before I hit the send button and beat me to the trade?  It sounds crazy, but I think it’s possible. What’s next, HFT algorithms reading our minds?  Maybe.