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Chapter 11 Order Anticipators

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.

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Chapter 11 Order Anticipators

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  1. Chapter 11 Order Anticipators

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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.

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