How is frontrunning bad?

There has been a lot of talk about frontrunning lately and even though it's focused on stocks I think it can be applied to any market. Frontrunning happens when an entity buy stocks/pair/whatever milliseconds after a big institutionnal order and sell right after the order passed and pushed the price up.

I really don't understand why so many bloggers (Mish, Denninger et al.) say it's a bad thing : wouldn't using limit orders instead of market orders take the problem away ?

My experience was in the NASDAQ market over a decade ago.

In stocks, frontrunning is sometimes described as acting before that large order. As a market maker, buying stock for your own "book" and not executing at that price or better for a customer's order that you held was unethical and also illegal.

I don't think there are regulations in spot forex for this kind of thing (yet). There is no central exchange, so there is no way to track volume or trades.

Though, if BMW gave an order to Deutsche Bank to Buy 500 million Euros to "work". Deutsche Bank might say "ok, I sold you 100 million at 1.2880", and "work" the rest. If price declines over time, BMW would hope to buy cheaper relative to the market. If price rose, hopefully, DB can skillfully get an average price over time that is slightly better than the London or European close.

If the order came to DB and within 10 minutes, they did not "print" anything to BMW and the price is 10 pips higher... Deutsche Bank might have been "frontrunning" the order. Will BMW come back and bring them another order?


(Disclaimer: This is from my workings on a NASDAQ trading desk over a decade ago, spot forex and computer order handling and high frequency trading have probably made this process much more complex...I was trying to create a simple example )

So to put it in forex terms, two examples of front running would be:

If you were placing a large enough market order to move the market some pips, your broker could theoretically place his own order in front of yours. He would be stealing liquidity that you would have otherwise bought yourself, thus giving you a worse average price.

(bad for you, good for broker)

and

If you had some secret knowledge about a large market order that was taking place and you placed your own order in front of it.

(good for you, bad for large impatient trader)

Correct, good luck trying to front run anyone in the FX market though. The information you'd need would be almost impossible to get, short of working in a bank or something. The closest you'll get to front running as a retail trader is knowing where stops are set and front running them a few pips before the stop price. IFR will sometimes report where stops are rumored to be sitting. As a stand alone approach to trading, it's probably not a good option. The information you'd need is hard to get and many times it would be in the form of a rumor. As a supplemental approach on rare occasions when you are very confident in your sources, you could use the method in a sort of 'cherry picking' manner.

One thing to keep in mind about stops though..They present valuable trading options to bigger players in the form of tightly packed liquidity and or market depth in the truest sense of the idea. When you know that a lot of traders will be offloading bad inventory because they were wrong the market, you could issue a very large limit order and get filled pretty easily at very attractive relative prices. Stops don't just get triggered for fun, and they don't cause as much disruption as everybody thinks. So, if you knew where stops were placed, you might think twice about trading with them, they are the tuna swimming into the shark's mouth. Other trader's in profit could also use the stops to get out at attractive prices. All I'm saying is that the proverbial stop hunting ideas so rampant in the retail community are mostly wrong. But, sometimes in the heat of the moment you may be able to take advantage of some momentum caused by stops.

Now that would be illegal. Front running orders were your employed.

read bill lipschutz, front running in forex is not illegal, even on clients orders. currenex even has a 'client follow' button!

Cowboy!!! What up, holmes?

Dont know what country your from but in most developed countries, theres such a thing as Fiduciary Laws. And brokers, bankers along with employees of such front running client orders would not be in the best interest of the client and covered as such.

The client follow as you say, is just that, its not front running, FXCM has the same thing it shows the direction of order flow and permits you to jump in that direction. It doesnot put you or your order in front of, any other client orders.

Keit

remind me to change my nick , I cant go anywere with out being recognized.

Got tired of trying to polish my social skills, you know that politically correct thing... it just was't working, I must be the most socially dysfunctional person there is... so I road off into the mountians, The Great Smokeys right now. Now.... I can cut all the cheese I want.... without some asshole behind me complaining.

been doing a lot of work on MT addon programs and code protection. Done some very unique things as in inter program communications, drag and drop objects, on chart order placement / management, and lots of other things... wont be releasing any of it in MT4 however. but will most likely in MT5. working on conversion now.

Keit