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I'm not sure I understand what you are saying. How does the brokerage make money off of that. If they are improving the price you haven't lowered their risk profile at all.

If they are taking the other side of your trade and the market doesn't reflect that, they've actually given you a free roll.

Suppose you want to buy XYZ for $1.00. You place your bid and are the highest price against a $1.03 offer.

Evil broker places a $1.01 bid and gets a fill.

He immediately offers $1.02.

Case 1: The market runs up, he makes his tick on essentially zero commissions. On some markets, you earn commissions for providing liquidity.

Case 2: The market falls off, he smacks your bid and only loses a penny.

This is edge.

EDIT: When I say "the market", he could base his actions off an index. As for "free roll", sure... but there is still an impact on liquidity and you're in a situation where you are more likely to get a fill whenever the market is going against you.

Is that legal trading anywhere? That seems like it would fall into front running definitions in all the jurisdictions I know of.

Legal? No. Does it happen: yes.

OK, but to my other reply. If they are going to blatantly front run, why would they even bother with the markets. Just spoof market behavior to you and take your money. Much easier.

If this behavior is impacting your execution why are you still using "Evil Broker"?

You mean, provide a false market?

They do that in FX (you're trading their market; it is up to you to know what is going on beyond their walls).

As for spoofing other markets, you can get away with front running.

EDIT: Adding this here since I can't reply to you kasey.

Why trade with Evil Broker? Don't. I suppose you can argue the difference between trading and investing.

Now, if you want to trade, well, just know they're going to fuck you and lubricate appropriately.

OldSchool 4672 days ago

Imagine your algorithm says that a certain non-volatile instrument isn't going to go much below 5.00 and often goes above 5.15. You place a limit order in advance to buy at 5.00 (market orders don't guarantee price) and if you get filled you'll be hoping to short at 5.15 or so later. "Evil Brokerage" comes in and offers to buy at 5.01. Remarkably, you observe that any time you pull your 5.00 order, their 5.01 order disappears.

The instrument heads toward your 5.00 target. If their order turns out to provide all the necessary liquidity at that moment, the sellers never reach you, and the instrument turns around and "Evil Brokerage" soon sell for higher. Alternatively, if the instrument is on a move and it going to go against you too, brokerage sell to you and they only lose 0.01/share. That's why I call the scenario a free stop loss.

I get that, but again, doesn't that fall under illegal trading behavior? If we are going to assume that the brokerages are rampantly front running, why assume they are even telling the truth about execution.

At that point they can just tell you that your trades executed that way without the bother of actually going into the market.

Further, why would you stay on an execution platform that is so obviously bad for you?

OldSchool 4672 days ago

I don't think it's illegal, not even really front-running. That'd be them turning a price profit on filling your order, not just using it to avoid a potential loss.

Also, you're right, at a minimum, via a subsidiary it's possible for the brokerage to "fill" your order without it ever reaching the exchanges, I think as long as it's inside the national bid-ask price spread at that moment. They pitch this as a feature - it also lets them avoid exchange fees. Then they can manage their overall risk separately.

Yes, I stopped trying to make those trades years ago. At one time though it was a remarkably consistent way to succeed on a small scale.

I'll admit I haven't looked at every broker, but every exchange that I know of, you have to opt in for orders to not go to the other exchanges.

This frequently is a feature for both sides of the equation due to lower fees, better execution rules, rebates, priority, etc.

I certainly know that I would never opt in to a platform that consistently provided worse execution (especially in the equities space where there are so many choices).

chollida1 4672 days ago

> You place a limit order in advance to buy at 5.00 (market orders don't guarantee price) and if you get filled you'll be hoping to short at 5.15 or so later.

Minor nitpick.

Since you've bought the stock first, your second trade will be a sell and not a short, unless you overfill on the second leg, in that case you'll have a partial sell and partial short.

OldSchool 4672 days ago

Correct. In this simple algo scenario the position is assumed to be long 1X or short 1X at any given time. After the first trade, all reversals trades are then either buy 2X or sell 2X until the very last trade.

https://www.tdameritrade.com/forms/AMTD2055.pdf‎

Very true. Case in point, Ameritrade's odd marriage with Citadel... think they might be reading the tape?