Legality of front running?

Discussion in 'Trading' started by Mvic, Jan 17, 2004.

  1. Mvic


    I have always thought that front running a large order was legal and was done all the time (though obviously doesn't do the client any good and therefore is bad business quite apart from being unethical). Just wanting to confirm that if you have knowledge of a large order that needs to be executed that that doesn't make buying the stock illegal. Any one know for sure?
  2. i would say it depends how you know. if you figured it out on your own its ok. if its inside info its not.
  3. Mvic


    to be true or are you just guessing? People at brokerages front run all the time (hear about Fund X wanting to buy X shares of xyz limit $x), people in the pits front run orders all the time. Is it illegal? Someone who actually knows please.
  4. Front running large equity programs is legal with the use of stock-index futures because each product is regulated by 2 very different regulatory agencies. Furthermore, most equity-derivative desks will "run in front" of an equity-program buy/sale with the use of index-futures because they just made the customer a bid or offer and are trying to hedge themselves of the risk that they have, having just assumed the clients position, which they will seek to unwind over the next few minutes, depending on what their view of the market is. Thus, the desk will make commissions on the program trade, +/- any of the "unwinding" of the position.

    Front running stock on an equity trading desk with stock is totally illegal, and I believe in many cases the use of equity-options to front-run is also illegal.

    Hope this helps answer your question.
  5. "Front running stock on an equity trading desk with stock is totally illegal, and I believe in many cases the use of equity-options to front-run is also illegal."

    not in all cases. if you are sitting in your office and you figured out through some tape reading skill or something else that a big order is going to hit you can legaly front run it.
    if you work at a firm and a buddy tells you that he has a big order that would be illegal as i understand the law.
  6. What about a CTA that manages several accounts and has the same strategy for all of his customers, i.e. wants to buy the same security at the same price for all of his customers? If he has a very large account, he might be afraid that the order from this account might have a big market impact and therefore he will try to submit the small orders before the last one to assure that they get filled first and at the specific price.
    Is this illegal front running?
  7. Mvic


    looks like the scenario I was wondering about is indeed illegal. It must not have been at some point, or if it was then there were a lot of people breaking the law (going back a decade or so). Equity desk guy, or pit broker telling his buddy that so and so has a larger order in to by xyz up to certain limit. I guess the regulators have wised up over the years.

  8. Mvic


    but I know for a fact it used to in the IMM pits at the CME back n the mid 80's.

    Maybe you were not around for Operations Hedgeclipper and Sourmash.

    Apparently chicanery is still going on

    Not sure when the camera's came in to the CME but they were there back in the 80's and the Smart system wasn't in place at the CBOT in the 80's that I am aware of.

    I just looked at your web site (nice) and from your bio it seems you didn't get to Chicago until some time in the 90's. The FBI investigations in '89 really shook things up and it seems you are saying that things are clean now(I assume you are a local), so much the better as those are the markets I trade. Good luck with the music.
  9. ertrader1

    ertrader1 Guest

    No no, im not a local. I know many, but im off the floor. I have heard of the 80s shady moves on the floor. But its not the norm on anyfloor, period and there is no such thing as legal front running. Just the term is a oximoron.

    Thanks onthe site...its not being used. We are rolling out a new site soon, more geared towards the label. I dont tour as much right now....and more producing records than playing actual clubs.
  10. Pabst


    Nice link mvic. You've shown how tough it is to front run in a futures pit. Traders have had to resort to the most innovative measures to pull it off. Estrader though is largely correct. Front running is mostly myth. In fact, the pager scam was investigated by allegations of another local who noticed that the perpetrator
    was always taking out bids in front of large sell orders executed by a certain broker. Things always self regulate.

    I traded in the Bond pit throughout the 80's and there was no front running. Institutional traders are devious. They may put in a bid for a 1000 contracts and then as locals pay up a tick higher that same institution will cancel the bid and start selling both futures AND cash.Financial futures are so liquid that even if I heard a clerk put in a 500 lot order (which I often did) I wouldn't even know for certain if that order would even turn the market. Hell if you pay over fair value for an index contract, no matter how much size you bid for will be taken out by an arb using you as the futures side of a program trade. And besides even if you could profitably front run, the guy's on the other side would get wise to being picked off and report you.
    #10     Jan 17, 2004