Front running as one of the types of trading on the exchange

Johannes Röll 29 / March / 20 Visitors: 478 ★★★★

Frontranning means “running ahead” or “running ahead”. This term is used to describe one of the types of trading used on the exchange. The essence of this method is that a trader trading intraday (scalper), manually or using an algorithm, must manage to put his application in the glass before a big player. Frontranking also means one more, the second method, which is considered illegal and punishable, while the first one can quite exist and exists on all exchange markets.

Legal way

The legal way is that the trader searches for a large volume in the “glass” of orders and starts trading from this volume in the opposite direction, placing his order exactly in front of the level at which this large volume is located.

For example, a trader sees a volume of 2066 contracts on a bid of 148,050. This volume significantly exceeds the remaining volumes in the “glass”, which may indicate that this application was posted by a major player. The trader assumes that this level will not be broken immediately, since 2066 contracts are not so easy to buy. Then the trader puts up his buy order one tick higher, at the level of 148 060. The logic is that when you try to break through the level of 148 050 the price will roll back up several times, and it is possible that it will generally turn up without being able to break through this level. As soon as the price rolls back from the level of 148,060, the trader will close his deal with a profit.

Illegal way

Illegal (in some jurisdictions) method is used mainly by the broker. The principle of use in this case is as follows. A trader orders, for example, to purchase a large volume of shares or market contracts. The broker accepts this order and in the interval between the acceptance of the order and its transfer to the gateway of the exchange itself manages to “insert” its own order to buy on the market with a significantly smaller volume. All this takes literally milliseconds, so the execution of this "trick" is possible only if there is an ultra-fast connection to the exchange, usually available to the broker himself.

As a result, the broker’s application is the first one - he buys a certain amount for himself, possibly shifting the price up (if the broker’s volume exceeded the volume of the nearest offer, that is, a limit sell order), then only a large client’s order “falls out” onto the market. The larger the client’s volume, the more he raises the price, since for its execution on the market it will be necessary to redeem all limit orders for sale, first at the nearest offer, then at the next, then at the next and so on. It turns out that while the client’s large order is executed, the price has already passed several ticks up and the broker will automatically be in profit, especially considering that he will not pay a commission to himself, only the exchange fee. This method is illegal and regulators are constantly trying to monitor the situation and punish offending brokers and traders.

Johannes Röll

Johannes Röll was born 1978 in Brilon,Germany. Graduated RWTH Aachen University. Over the past ten years he worked as Head of the plastic card team, where he was mainly responsible for the development of the distribution, Head of sales Department and Financial Analyst,where he got experience in planning and support sales figures for branches. For the present he works as freelancer