[trader220]

Round about 8 years ago I was approached by several HFT firms who wanted to give me a consultants fee because I sat on some committees at the exchanges I was a member of. They all wanted the same info. The off site location of the exchange servers. The closer they were the better, when you're fighting over fractions of a second.

As others have pointed out, their strategy was essentially just a front running strategy. They would send and cancel thousands of orders a second trying to fish out the real orders and trade them to either A) capture fractions of a penny per share, or B) trade for a wash and collect the rebate (payment for orderflow) money.

Yes it adds up quickly.

The original guys back in the 1980's were known as SOES bandits. They figured out then how to front run orders on the SOES system. ( Small Order Execution System). The markets were much much wider and slower in those days. Once you had the keys to the kingdom it was easy to front run orders for big profits.

There was a day even before that when front running was totally legal. On many of the Futures Exchanges you could be both a market maker and a floor broker. You could execute trades for your own account and for customer accounts. You could actually front run your own orders. Guys on the COMEX in the 70's and early 80's could literally make a fortune with no risk at all if they had really good institutional clients. Those were the days. Then again thats when the $2 dollar broker existed on the NYSE too. Two bucks to execute, LOL.... My grandfather was an NYSE specialist for 50 years. He retired in the early 1970's and I was still a kid. When I graduated and went to work on the floor he was pretty sick and the only advice he ever gave me was to "get yourself a good pair of shoes". I remember many other stories he would tell long before I became a trader in the 1980's.