5 ms·

How is step 3 not front running? It would appear to be the very definition; the wholesaler is executing an order before yours, without your knowledge, that will

How is step 3 not front running? It would appear to be the very definition; the wholesaler is executing an order before yours, without your knowledge, that will affect your order. Is there an order option to prohibit wholesalers from trading before you?

cloudjacker 10y ago
Because the broker isn't doing the front running. That's why it isn't the currently illegal kind of frontrunning. They sell the data to other participants who have faster internet connections than you. Basically any time you send a "smart" routing order, it is actually the least smart thing to do (unless you REALLY need the liquidity). Your trade order gets sent to all the exchanges, and ah I don't really feel like explaining it. tl;dr Someone intercepts your data packet to one exchange, and alters the liquidity on the other exchanges, so you get a partial fill and then adjust your order at the slightly worse price.
- jsprogrammer 10y ago
  >Because the broker isn't doing the front running. In the scenario presented, the wholesaler receives your order, then executes its own orders, then fills your order based on its own executions (which you are unaware of).
  - tptacek 10y ago
    The wholesaler is required by law to meet or beat the NBBO --- the "exchange price". If you took your tiny order directly to an exchange, you would not fare better.
    - jsprogrammer 10y ago
      The defense is that this behavior is legally sanctioned front running? How can a wholesaler guarantee the exchange price in the face of disappearing orders? I don't think they can. Instead, the wholesaler fabricates an order at the limit of your order, then reports the sale to you. Edit: [rate-limited] Reply to tptacek comment below: > I can't even tell if you're talking about market or limit orders. Can you view the context of this thread? I am talking about the explicit steps listed in the comment I first replied to. Specifically, step 3 [0]. In chollida's description the orders are limit. Step 3 appears to be, exactly, front-running as explained in my post [1] immediately above this one. I asked if anyone could explain how that behavior was not front-running. You responded; indicating that the behavior was according to regulation. You claim that the wholesaler must give you the best "exchange price", but I claim that such a guarantee is generally impossible to fill (time-distance-information problem), and that in the specifics of chollida's described scenario, the wholesaler is actually front-running you by examining your unfilled (limit) order and then filling it at the limit (as in, calculus) with it's own fabricated (perhaps, synthetic, but front-ran, nonetheless) order. If such a guarantee is generally impossible, then the wholesaler must be cheating, the law is incompetent, or, both. [0] https://news.ycombinator.com/item?id=11668835 https://news.ycombinator.com/item?id=11668835 [1] https://news.ycombinator.com/item?id=11669193 https://news.ycombinator.com/item?id=11669193
      - tptacek 10y ago
        I don't understand any of these three sentences. Can you reformulate your argument as a sequence of events, like: T0: Bob->Schwab: Market BUY 100 ISSX T1: Schwab->Citadel: Forward Market BUY 100 ISSX ... and so on? I can't even tell if you're talking about market or limit orders.
        tptacek 10y ago
        If you place a limit order, you're guaranteed that any execution you get will be at least as good as your limit. That's the point of a limit order. You aren't entitled to a better price than your limit. If you think you are, can you provide a sequence of trades in which someone else captures a premium where they don't take downside risk?
        jsprogrammer 10y ago
        I don't see how taking on downside risk improves the wholesaler's position (in fact, I think the rationalization is an even more degenerate case). The fact still remains that the wholesaler has fabricated an order on the knowledge of a customer's pending order, which affected the execution price of the customer's order, before the customer could even know that it happened. Even if the wholesaler sent their order to an exchange and still matched with their customer, it is still front-running, as the wholesaler is using knowledge of their customer's order to, essentially, eliminate all possible price improvements. So, what is being called a "limit order" is just code for "we might just fill your order at your limit [when there are no market orders], if we think we can make money off [front-running] your order with our own". It would perhaps be acceptable if the wholesaler offered some kind of kick-back on any profits made, but that would need to be a different kind of order and I'm not aware of anywhere that does it.
        kasey_junk 10y ago
        Your broker or the wholesaler both have a choice: 1) match the order with the NBBO. 2) send the order to the exchange. If your limit is better than the NBBO, then they are required by the law to price improve it. Further, the nature of their agreements with your broker are such that they are required to maintain a price improvement level (that should be better than NBBO compliance). That is, incidentally also largely the requirement the exchanges operate under as well. A limit order doesn't have anything to do with the existence or non-existence of market orders, it has to do with your limit and the NBBO. The way they make money is not by changing the market against your interests, but instead booking the spread (and in fact the reason they like retail order flow is that it is naturally uncorrelated so the spread is more even). The customer does in fact know that this is happening as it is a regulatory requirement that they disclose it. I suspect that lots of whole sellers would be happy to kick back profits, if the retail customer was also on the hook to back the losses. Instead, they aren't and they get heavily discounted (to the point that it is now free to trade) trading costs instead.
    - dragonwriter 10y ago
      > The wholesaler is required by law to meet or beat the NBBO --- the "exchange price". Then again, this discussion is on a thread about the US DoJ investigating wholesalers for potentially breaking the law when it comes to what price the required to provide (though apparently a different requirement than the NBBO, specifically, the "best execution reasonably available".) A legal requirement doesn't mean its going to happen in practice, it means that there is, at least in theory, a remedy available if it doesn't. (Then again, not meeting or beating the NBBO seems a bit more obvious than not providing the best execution reasonably available, so I'd be somewhat more surprised if this wasn't happening simply because it would seem hard to get away with except in some extreme edge cases.)
kasey_junk 10y ago
Some brokerages allow you to set your routing preference. You will pay more for those brokerages orders.

cloudjacker 10y ago

Because the broker isn't doing the front running. That's why it isn't the currently illegal kind of frontrunning. They sell the data to other participants who have faster internet connections than you. Basically any time you send a "smart" routing order, it is actually the least smart thing to do (unless you REALLY need the liquidity). Your trade order gets sent to all the exchanges, and ah I don't really feel like explaining it. tl;dr Someone intercepts your data packet to one exchange, and alters the liquidity on the other exchanges, so you get a partial fill and then adjust your order at the slightly worse price.

jsprogrammer 10y ago
>Because the broker isn't doing the front running. In the scenario presented, the wholesaler receives your order, then executes its own orders, then fills your order based on its own executions (which you are unaware of).
- tptacek 10y ago
  The wholesaler is required by law to meet or beat the NBBO --- the "exchange price". If you took your tiny order directly to an exchange, you would not fare better.
  - jsprogrammer 10y ago
    The defense is that this behavior is legally sanctioned front running? How can a wholesaler guarantee the exchange price in the face of disappearing orders? I don't think they can. Instead, the wholesaler fabricates an order at the limit of your order, then reports the sale to you. Edit: [rate-limited] Reply to tptacek comment below: > I can't even tell if you're talking about market or limit orders. Can you view the context of this thread? I am talking about the explicit steps listed in the comment I first replied to. Specifically, step 3 [0]. In chollida's description the orders are limit. Step 3 appears to be, exactly, front-running as explained in my post [1] immediately above this one. I asked if anyone could explain how that behavior was not front-running. You responded; indicating that the behavior was according to regulation. You claim that the wholesaler must give you the best "exchange price", but I claim that such a guarantee is generally impossible to fill (time-distance-information problem), and that in the specifics of chollida's described scenario, the wholesaler is actually front-running you by examining your unfilled (limit) order and then filling it at the limit (as in, calculus) with it's own fabricated (perhaps, synthetic, but front-ran, nonetheless) order. If such a guarantee is generally impossible, then the wholesaler must be cheating, the law is incompetent, or, both. [0] https://news.ycombinator.com/item?id=11668835 https://news.ycombinator.com/item?id=11668835 [1] https://news.ycombinator.com/item?id=11669193 https://news.ycombinator.com/item?id=11669193
    - tptacek 10y ago
      I don't understand any of these three sentences. Can you reformulate your argument as a sequence of events, like: T0: Bob->Schwab: Market BUY 100 ISSX T1: Schwab->Citadel: Forward Market BUY 100 ISSX ... and so on? I can't even tell if you're talking about market or limit orders.
      - tptacek 10y ago
        If you place a limit order, you're guaranteed that any execution you get will be at least as good as your limit. That's the point of a limit order. You aren't entitled to a better price than your limit. If you think you are, can you provide a sequence of trades in which someone else captures a premium where they don't take downside risk?
        jsprogrammer 10y ago
        I don't see how taking on downside risk improves the wholesaler's position (in fact, I think the rationalization is an even more degenerate case). The fact still remains that the wholesaler has fabricated an order on the knowledge of a customer's pending order, which affected the execution price of the customer's order, before the customer could even know that it happened. Even if the wholesaler sent their order to an exchange and still matched with their customer, it is still front-running, as the wholesaler is using knowledge of their customer's order to, essentially, eliminate all possible price improvements. So, what is being called a "limit order" is just code for "we might just fill your order at your limit [when there are no market orders], if we think we can make money off [front-running] your order with our own". It would perhaps be acceptable if the wholesaler offered some kind of kick-back on any profits made, but that would need to be a different kind of order and I'm not aware of anywhere that does it.
        kasey_junk 10y ago
        Your broker or the wholesaler both have a choice: 1) match the order with the NBBO. 2) send the order to the exchange. If your limit is better than the NBBO, then they are required by the law to price improve it. Further, the nature of their agreements with your broker are such that they are required to maintain a price improvement level (that should be better than NBBO compliance). That is, incidentally also largely the requirement the exchanges operate under as well. A limit order doesn't have anything to do with the existence or non-existence of market orders, it has to do with your limit and the NBBO. The way they make money is not by changing the market against your interests, but instead booking the spread (and in fact the reason they like retail order flow is that it is naturally uncorrelated so the spread is more even). The customer does in fact know that this is happening as it is a regulatory requirement that they disclose it. I suspect that lots of whole sellers would be happy to kick back profits, if the retail customer was also on the hook to back the losses. Instead, they aren't and they get heavily discounted (to the point that it is now free to trade) trading costs instead.
  - dragonwriter 10y ago
    > The wholesaler is required by law to meet or beat the NBBO --- the "exchange price". Then again, this discussion is on a thread about the US DoJ investigating wholesalers for potentially breaking the law when it comes to what price the required to provide (though apparently a different requirement than the NBBO, specifically, the "best execution reasonably available".) A legal requirement doesn't mean its going to happen in practice, it means that there is, at least in theory, a remedy available if it doesn't. (Then again, not meeting or beating the NBBO seems a bit more obvious than not providing the best execution reasonably available, so I'd be somewhat more surprised if this wasn't happening simply because it would seem hard to get away with except in some extreme edge cases.)

kasey_junk 10y ago

Some brokerages allow you to set your routing preference. You will pay more for those brokerages orders.