Transcript Chapter 11 Order Ant..

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.
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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.
