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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

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.
      - jsprogrammer 10y ago

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.
    - jsprogrammer 10y ago