Since frontrunning is again being talked about by technologists, would like to explain the classical version of it, which is almost the opposite of the way that most technologists think it works:
-
-
Bob then waits "a little while" and sees what happens to Google. If Google goes up to $100.15, Bob tells Charlie: "Good news, I got you a share at $100.15" and fulfills that share with the share Bob bought at $100. If Google goes to $99.85, Bob tells Charlie: "Got it at $100."
Show this thread -
Broker Bob thereby gets to play short-term speculation with his client's capital at risk and no material chance of loss. The underlying theft is not because Bob was faster, it was because Bob was willing to lie about Bob's intentions after the fact.
Show this thread -
From this follows pretty automatically "Front-running is at 2019 at an all time low because computers are really good at keeping accurate paper trails." Technologists think it is close to an all-time high because high-frequency computers make it easier to race clients / etc.
Show this thread -
Note that this frontrunning also structurally requires an informational asymmetry (Charlie can't know what the true price of Google was with sufficient resolution to catch Bob on the lie), which is something which computers/open feeds/etc work to substantially mitigate.
Show this thread -
When people propose e.g. "You need to let large positional traders somehow execute their trades without exposing this fact to other market participants, or they will be 'front run'", they are proposing substantially rolling back effective front-running protection mechanisms.
Show this thread
End of conversation
New conversation -
-
-
That is actually one form of front running. No need to invoke optionality if the order is large enough to move the market. Of course that's still different from competing traders with no fiduciary duty towards each other racing to a trade.
Thanks. Twitter will use this to make your timeline better. UndoUndo
-
Loading seems to be taking a while.
Twitter may be over capacity or experiencing a momentary hiccup. Try again or visit Twitter Status for more information.