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No, the reason it's illegal is because it's a fraudulent use of insider knowledge. Just because something has no added value does not make it illegal. EDIT (re

No, the reason it's illegal is because it's a fraudulent use of insider knowledge. Just because something has no added value does not make it illegal. EDIT (reply to below): >However, logically, If there was value being added, this could be extracted absent harm to client. But since there is no fundamental value being added, this is impossible.< This makes no sense. This almost seems like a tautology. Are you going to say that everything in society with no added value (value being vaguely defined to the point of being meaningless) is (or should be) illegal?

001sky 14y ago
No, the reason it's illegal is because it's a fraudulent use of insider knowledge. No, It's more technically the inevitable harm it causes the client (which is a conflict of interest). However, logically, If there was value being added, this could be extracted absent harm to client. But since there is no fundamental value being added [1], this is impossible. And so at a logical level, its like statuatory rape. Its illegal because its deemed no good can come of it. Just because something has no added value does not make it illegal. True. But Nobody is arguing this. There is a correlation/causation fallacy to be mindful of. There is alot of overlap (correlation) but its not perfect (~causation). This does not rule out that where it <is> illegal (overlap) the cause is related to the value added/not issue. [edits-- to respond/clarify per new comments above] ________ [1] Front running in the "true sense" is this: client wants to buy X amount of asset Z for at the market price. places order with dealer [with our without a limit P]. Dealer buys X (or a subset) of asset Z cheaper than P and sells at up to P, taking the difference as profit with zero net/residual risk in the underlying. If the dealer did not intervene, the client would be better off. The trade is only profitable for the dealer because it is risk-less, but it is risk-less only because he has <information> the client <gave> him. That info was "given" under the presumption that it would not be mis-used (ie, by front-running, etc). Since this info needs to be given (1) for <any> trades to happen; and (2) is inherently subject to this type of zero-sum abuse; it is historically unethical/illegal/etc for this type of front running to be persued by licensed BDs (or equivalents). This is distinct from market making (where risk is being taken), etc. and other legitimate forms or speculating, etc.

001sky 14y ago

No, the reason it's illegal is because it's a fraudulent use of insider knowledge. No, It's more technically the inevitable harm it causes the client (which is a conflict of interest). However, logically, If there was value being added, this could be extracted absent harm to client. But since there is no fundamental value being added [1], this is impossible. And so at a logical level, its like statuatory rape. Its illegal because its deemed no good can come of it. Just because something has no added value does not make it illegal. True. But Nobody is arguing this. There is a correlation/causation fallacy to be mindful of. There is alot of overlap (correlation) but its not perfect (~causation). This does not rule out that where it <is> illegal (overlap) the cause is related to the value added/not issue. [edits-- to respond/clarify per new comments above] ________ [1] Front running in the "true sense" is this: client wants to buy X amount of asset Z for at the market price. places order with dealer [with our without a limit P]. Dealer buys X (or a subset) of asset Z cheaper than P and sells at up to P, taking the difference as profit with zero net/residual risk in the underlying. If the dealer did not intervene, the client would be better off. The trade is only profitable for the dealer because it is risk-less, but it is risk-less only because he has <information> the client <gave> him. That info was "given" under the presumption that it would not be mis-used (ie, by front-running, etc). Since this info needs to be given (1) for <any> trades to happen; and (2) is inherently subject to this type of zero-sum abuse; it is historically unethical/illegal/etc for this type of front running to be persued by licensed BDs (or equivalents). This is distinct from market making (where risk is being taken), etc. and other legitimate forms or speculating, etc.