Here is a short explanation of how they front-run transactions.
Wall Street responds to Michael Lewis' Flash Boys - Mar. 31, 2014
Quote:
CNN:
Here's how it works: Critics say some traders use high-frequency technology, HFT for short, to allow them to see a slower trade request coming through the system. The HFT firm then sells shares to the pension or mutual fund at a higher price. This all takes place in a matter of nanoseconds and may only result in a penny or so additional cost, but it adds up.
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The New York Attorney General, Eric Schneiderman, has described high-frequency technology as "insider trading 2.0."
Last week, Schneiderman told law students at NYU that his office "will continue to shine a light on unseemly practices that cater to high-frequency traders at the expense of other investors."
He singled out certain stock exchanges, which he said enable high-frequency firms to "co-locate" their computer servers in the same data center used by the exchange, giving them the ability to execute trades a fraction of a second faster than other investors.
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"Mutual funds and 401(k)s are losing a slice of some amount on literally every single trade," said Kelleher. "We're talking about vast sums of money traded by those entities on behalf of investors and retirees. That's how Wall Street rips off Main Street every day."
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Because it is done with technology, they claim it is legal. However front-running is illegal! They will argue the letter of the law, not the spirit of the law!
But... the laws and regs did not keep up with the technology for a reason!!!... you can see the lobbying links in my previous post about regs being squashed.
If it is not illegal, it soon will be.
Of course those engaged in it, making the money, claim it is all just a big misunderstanding... In effect, the public and others are just too dumb to understand it, they are actually helping everyone out...
It will be interesting to see what the Justice Dept, FBI and SEC uncover.