[yummyfajitas]

This is complete nonsense.

Front running your client's trades is completely illegal. Front running on an exchange is not even possible unless you hack the exchange computers (also illegal). The first person to place an order at a given price on a given exchange wins.

The only sort of front running which is legal is guessing ahead of time what a third party might do and placing orders before they actually do it. I.e., you might guess that Apple plans to buy Yahoo and buy Yahoo shares in anticipation of this event. Do you have evidence GS has done this?

[pocoloco]

While front running may be illegal it seems that is possible to do front running if you’re properly placed in the stock exchanges. Max Keiser and Hellen Brown discuss this in the video [1] regarding how this can be done by “specialist brokers.”

For good measure read also Hellen’s article [2].

[1] http://www.youtube.com/watch?v=V5G7zBWMpIs&feature=playe...

[2] http://www.huffingtonpost.com/ellen-brown/stock-market-colla...

[yummyfajitas]

Your second link has nothing to do with front running. Your first link just reveals Hellen Brown is full of crap.

In the old days, market makers could potentially front run by physically ignoring the proper market ordering (i.e., in a physical trading pit), perhaps when the broker ahead of them in the queue is distracted with another trade. This is completely impossible in an electronic exchange. There is no "front run this trade" message in either FIX or OUCH (the wire protocols used for trading).

[codexon]

http://seekingalpha.com/article/150397-flash-trading-goldman...

[marltod]

There is more than one exchange. If you see a Bid of 10$ come up on the NYSE you can put in a bid of 9.99 on another exchange and if that order gets filled you can then turn around and try to match that bid of $10 on the NYSE if you are fast enough.

[yummyfajitas]

The bid of 9.99 will NOT get filled before the bid of 10, except under very special circumstances, even on separate exchanges. The exchange with the lower bid is required to route the trade to the exchange with the higher bid as a result of RegNMS.

http://en.wikipedia.org/wiki/Regulation_NMS

The only time this rule fails to apply is under extremely high latency scenarios. For example, last thurs when nasdaq left the machines on but NYSE switched to human matching, RegNMS was suspended.

[borism]

not very reliable source, i know, but try

http://www.google.com/search?q=goldman+sachs+front+running

[yummyfajitas]

The top link just links to a criticism of flash orders, which are not front running at all [1]. Could you be more specific in your links?

[1] I'm undecided about whether I think front running is fair, but flash orders are a separate issue.

[codexon]

Intercepting flash orders is front running. I don't see how you could even be confused about this issue. That is why the SEC wants to ban it, and some exchanges have removed the feature. This corrupt business practice creates artificial information disparity which wouldn't normally exist.

I'm undecided about whether I think front running is fair

This is a red flag that no one here should be asking you for moral advice.

[yummyfajitas]

Front running: Joe wants to buy shares. I buy ahead of Joe, driving up the price, let him buy, then I sell my shares, profiting off the price delta. This costs Joe money, since he buys at a high price and sells at a lower price.

Flash trading: Joe wants to buy shares at price 10 or better and places an order on NYSE. The best ask on ARCA is 9.99, but the best ask on NYSE is 10. NYSE gives me the option of filling Joe's order at price 9.99 (rather than routing the trade to ARCA), saving Joe the cost of routing.

Flash trading and front running are just not the same thing. Flash trading only happens to traders who chose for their orders to be flashed. All flash trading does is moves the trade from ARCA to NYSE.

[codexon]

Flash trading: Joe wants to buy shares at price 10 or better. You are Goldman Sachs, you see Joe's order before anyone else.

You see shares costing 9.80, so you buy it up quickly, and sell it to Joe for 10, making a profit of 0.20 per share while driving up prices for Joe.

That is front running.

[yummyfajitas]

You apparently do not know what a flash trade is.

A flash trade gives Goldman the opportunity to fill Joe's order at the NBBO price before it is routed to another exchange. It does absolutely nothing else. The person receiving the flash is even prohibited from making offers on that security on other exchanges for a few milliseconds after receiving the flash.

This gives Goldman an advantage over other high frequency traders since it gives Goldman a higher fill rate, which is definitely unfair.