Chapter 11

Order Anticipators

Order Anticipators

Front runners, Sentiment-oriented technical traders, Squeezers, Manipulation of stop orders

They do not make prices more informative or markets more liquid.

Tick size is important. They are all parasitic traders.

Front Runners Front running aggressive traders

• Profit from the price impact of aggressive traders. Discuss example.

• Illegal when they violate a confidential brokerage relationship.

Front running passive traders• Quote matching or penny jumping. Discuss

example.• Extract option values of the standing orders.

Front Running and Market Efficiency Make prices less informative when they

front run uninformed traders. Make prices more informative when they

front run informed traders. Long-run effect of informed traders may be

to make market prices less informative!• Why? Because traders invest less in

information due to smaller profits.

Front Running and Liquidity

Front runners make markets less liquid. They benefit the traders with whom they

trade when they improve prices to step in front of other traders.

They do so at the expense of the traders they front run. (Extracting option values)

Some traders become less aggressive when confronted with front runners.

Sentiment-Oriented Technical Traders They try to predict the trades that

uninformed traders will decide to make. They profit from the price impact of

uninformed trades. Their trading make market prices less

informative because they try to trade before uninformed traders.

They make markets less liquid.

Squeezers

They try to monopolize one side of a market so that anyone who must liquidate a position on the other side must trade with them.

Make prices less informative. Illegal in the US.

Manipulation of Stop Orders

“Gunning the market” Push prices up or down to activate stop

orders. Stop orders then accelerate those price

changes. They close their positions at a profit by

trading with the stop orders! Use example. Illegal in the US. But almost impossible to

enforce.