5 ms·

Just curious: Suppose there is some difference between buying price range and selling price range. The dealer (middle man) could become temporary in-between bu

Just curious: Suppose there is some difference between buying price range and selling price range. The dealer (middle man) could become temporary in-between buyer or seller and take some of the profit due to this price difference. For example this could happen at a stockbroker or at a crypto exchange. Is this behavior regulated, and if so, how?

kqr 5y ago
I'm not sure what you're saying, but the spread between buying price and selling price is exactly how the temporary middle man gets paid for the risk they take in matching up buyers and sellers. The size of the spread depends on how large the perception of that risk is.
- erwincoumans 5y ago
  Example to clarify: Buyer tells the trader to buy for (up to) 140. Seller wants to sell for (at least) 120. Trader gives 120 to seller, gets 140 from buyer, gets to keep 20 for himself.
  - kqr 5y ago
    Yes, and that's exactly how the middle man is compensated for the risk they take by buying something from someone they don't want, hoping to resell it shortly after.
    - erwincoumans 5y ago
      If this happens on an exchange (such as Coinbase), there is no risk, since the trader/middle man knows that there is a buyer for 140 and a seller for 120, so he can 'front run', buy at 120, sell at 140, keep 20.
  - gpderetta 5y ago
    If the seller is already in the market for an ask at 120, and there is a buyer ready to buy at 140, no trader can come in an pocket the difference in a regulated market. If there is no buyer yet and a trader suspect there might be in the future, it could try to buy at 120 and hope to sell in the future at 140. Of course the the sale might not materialize and they will need to take the risk.
  - nly 5y ago
    Best execution kicks in on most exchanges. The second order never hits the order book (nobody observing the book will even see it) and the trade executes at the price of whoever put on their bid/offer first.
speeder 5y ago
This is regulated in some senses (doing this as exchange is a big no-no). Also this is theoretically, the point of High Frequency Trading... Sadly this is only theoretical, seemly they are quite willing to make the market messy to force this difference to exist so they can profit more, and not many governments so far are bothered by that.
- SkipperCat 5y ago
  I work in HFT. We do not front run orders. We make money by finding correlated assets that when traded together, will create profits more often than not. Usually there is a mathematical relationship between the two (this is what the Black-Scholes model proved and won Nobel prize). The reason that this trading style is called "High Frequency" is that everyone knows these relationships and therefore it's a race to get there first. Much like the scene from "Glengary Glen Ross", the first person who gets there gets a lot, the second person gets a nibble and the third person gets nothing. The whole value of this is profits for the firm and high liquidity for everyone else. Not saying it's a noble pursuit, but we follow all the SEC, FINRA and other market regs (most importantly NBBO).
  - speeder 5y ago
    Some HFT DO front run (after all, they got caught). But that is not what I was talking about even. I am talking about the firms that do spoofing, layering, etc... Basically a lot of HFTs that instead of just doing "daytrading" style trades or arbitrage, attempt to influence the market in some way, hopefully making the spreads bigger and whatnot.
    - Kranar 5y ago
      Can you please list which firms you are aware of that got caught front running?
gpderetta 5y ago
The order flow is usually public. If a broker were to intercept a client order in flight to pocket the difference, it would be called front running and it is illegal in most places. Crypto is not regulated, so the order book could be completely fictional and there would be no recourse.
- erwincoumans 5y ago
  Thanks, that clarifies things. If so, crypto exchanges such as Coinbase could make a lot of money this way.
  - e40 5y ago
    IIRC, I’ve seen posts about them doing just this. I have no idea if it is true, though.

kqr 5y ago

I'm not sure what you're saying, but the spread between buying price and selling price is exactly how the temporary middle man gets paid for the risk they take in matching up buyers and sellers. The size of the spread depends on how large the perception of that risk is.

erwincoumans 5y ago
Example to clarify: Buyer tells the trader to buy for (up to) 140. Seller wants to sell for (at least) 120. Trader gives 120 to seller, gets 140 from buyer, gets to keep 20 for himself.
- kqr 5y ago
  Yes, and that's exactly how the middle man is compensated for the risk they take by buying something from someone they don't want, hoping to resell it shortly after.
  - erwincoumans 5y ago
    If this happens on an exchange (such as Coinbase), there is no risk, since the trader/middle man knows that there is a buyer for 140 and a seller for 120, so he can 'front run', buy at 120, sell at 140, keep 20.
- gpderetta 5y ago
  If the seller is already in the market for an ask at 120, and there is a buyer ready to buy at 140, no trader can come in an pocket the difference in a regulated market. If there is no buyer yet and a trader suspect there might be in the future, it could try to buy at 120 and hope to sell in the future at 140. Of course the the sale might not materialize and they will need to take the risk.
- nly 5y ago
  Best execution kicks in on most exchanges. The second order never hits the order book (nobody observing the book will even see it) and the trade executes at the price of whoever put on their bid/offer first.

speeder 5y ago

This is regulated in some senses (doing this as exchange is a big no-no). Also this is theoretically, the point of High Frequency Trading... Sadly this is only theoretical, seemly they are quite willing to make the market messy to force this difference to exist so they can profit more, and not many governments so far are bothered by that.

SkipperCat 5y ago
I work in HFT. We do not front run orders. We make money by finding correlated assets that when traded together, will create profits more often than not. Usually there is a mathematical relationship between the two (this is what the Black-Scholes model proved and won Nobel prize). The reason that this trading style is called "High Frequency" is that everyone knows these relationships and therefore it's a race to get there first. Much like the scene from "Glengary Glen Ross", the first person who gets there gets a lot, the second person gets a nibble and the third person gets nothing. The whole value of this is profits for the firm and high liquidity for everyone else. Not saying it's a noble pursuit, but we follow all the SEC, FINRA and other market regs (most importantly NBBO).
- speeder 5y ago
  Some HFT DO front run (after all, they got caught). But that is not what I was talking about even. I am talking about the firms that do spoofing, layering, etc... Basically a lot of HFTs that instead of just doing "daytrading" style trades or arbitrage, attempt to influence the market in some way, hopefully making the spreads bigger and whatnot.
  - Kranar 5y ago
    Can you please list which firms you are aware of that got caught front running?

gpderetta 5y ago

The order flow is usually public. If a broker were to intercept a client order in flight to pocket the difference, it would be called front running and it is illegal in most places. Crypto is not regulated, so the order book could be completely fictional and there would be no recourse.

erwincoumans 5y ago
Thanks, that clarifies things. If so, crypto exchanges such as Coinbase could make a lot of money this way.
- e40 5y ago
  IIRC, I’ve seen posts about them doing just this. I have no idea if it is true, though.