Block orders picked off by HFT traders

The SEC's proposal to require dark pools (dark pools news) to be indentified when they execute trades--currently the trades are classified simply as over-the-counter--has roused a lot of opposition from the buy side.

One fear of course is that savvy and technologically sophisticated traders will sniff out some trades, identifying them as large orders, and then trade on that information. For that reason, the SEC has exempted block orders with a market value of at least $200,000 from the new rule. But the fact is that high-frequency traders (high-frequency trading news) are already picking off block trades and finding ways to trade on that information.

A study by Quantitative Services Group has found that high-frequency traders are using pattern-recognition software to "see footprints that block orders leave from algorithmic trades." According to Traders, the high-frequency traders then buy alongside institutions, pushing up the price they pay. They then sell the stock to the institutions for a profit. About 20 percent of the orders in the study had "significantly" higher-than-average costs that were then usually followed by big price declines, suggesting that someone is sniffing out institutional orders and trading on the information.

For more:
- here's the Traders article 

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