Cross-talk (frontrunning) across markets

B

bungrider

Say an institution is getting ready to sell size in the S&P futures pit. This institution makes markets in all mid- and largecap US equities. It has prop/program trading operations in all US equity, US bond, and most major equity futures markets.

So the intitution's system trading robot has suddenly spit out a huge sell signal for the S&P...and now their trader is getting ready to execute the order, which will, no doubt, affect the market.

Can that institution use the futures info to affect their market making before they sell the S&P? (In other words, after the robot said "sell," but prior to the actual execution of the sell order in the pit, would they now become sellers, but not buyers, of the stocks in which they make markets in prior to the execution of the S&P sell)...?
 
you just turned an almost riskless transaction into a risk situation.

Not exactly arbitrage and extremely hard to do with real size

Robert
 
think about this....


Stocks are undervalued compared to futures....

you are suggesting that they sell a lot of stocks.


If they were to sell stocks they would push it more out of whack and somebody else who does arbitrage would profit from them.


Futures usually lead stocks not the other way around.


This is due to front running ...

If a broker gets a huge order for the market that will move the market. He will guarantee a certain price to the person who gave the order. The broker hedges his risk (the reason futures were created) in the futures pits before executing for the client.
They front run their customers all the time in futures as it is allowed due to being a different vehicle.

Robert
 
Got it, thanks.

This may be the first time on ET that I asked a difficult question and got a straight answer (not to mention correct) right off the bat.
 
Bung,

I have often contemplated this scenario. Because of my trading strategy I see instances all the time where it appears that the equity and futures desks are communicating their trades. If I detect that this is the case iI will try to use it to make some quick trades.

For instance, I often see times when a big house like GSCO will come into the futures pit with a big sell order that will momentarily push down the futures market. At the same time I observe GSCO standing pat on the bid on the level II for a large cap like CSCO buying and buying. When this happens I'll often jump on with him buying into the stock with the expectation that when his momentary selling in the futures pit subsides the stock will get a momentary rise and I can pull out a quick scalp.

Conversely, when I hear on the squawk that GSCO is selling the futures and is nowhere to be found on the bid but is also selling the stock I'll jump on the sell with him. Basically just a 'shadowing the axe' type strategy but I use the inter-play of the futures pit action to try and determine what the big boys are trying to accomplish. It is a totally discretionary type of trade that I can only do successfully after I have been focussing on the stock all day. I don't know whether or no the futures and equities desks are actually coordinating there trading or not but he appearance is certainly there.

Not sure if this is the kind of response you were looking for to your question but there it is anyways.
 
The "conspiracy theory" or even the well know "front running" / "institutional curtain" (between brokerage and trading desks), has often concerned traders at all levels. What has happened over the last couple of decades, is that the number of disparate players has grown to a point that it is much more difficult to "run" the market one way or another. Sure, small "bets" can be made relying on a 1000 lot of futures, but because the risk/reward is lower (as per Mr. Tharp's response) than simple arbitrage, we don't see as much as one might think.

There are a lot of big players in the market, with different strategies that tend to "counter" one another, thus causing "efficient" markets (for the most part).

Stuff still happens, but I try not to concentrate on the rarities, and try to focus on the obvious (market movements).

Don
 
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