Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- Acknowledgements
- Notes on contributors
- Introduction
- PART I HOUSEHOLDS AND FIRMS
- PART II FINANCIAL MARKETS
- 4 Financial liberalisation and exchange rate volatility
- 5 Capital mobility, vehicle currencies and exchange rate asymmetries in the EMS
- Discussion
- 6 Shifting gears: an economic evaluation of the reform of the Paris Bourse
- 7 Front-running and stock market liquidity
- 8 Auction markets, dealership markets and execution risk
- Discussion
- 9 The impact of a new futures contract on risk premia in the term structure: an APT analysis for French government bonds
- PART III BANKS
- Index
7 - Front-running and stock market liquidity
Published online by Cambridge University Press: 20 March 2010
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- Acknowledgements
- Notes on contributors
- Introduction
- PART I HOUSEHOLDS AND FIRMS
- PART II FINANCIAL MARKETS
- 4 Financial liberalisation and exchange rate volatility
- 5 Capital mobility, vehicle currencies and exchange rate asymmetries in the EMS
- Discussion
- 6 Shifting gears: an economic evaluation of the reform of the Paris Bourse
- 7 Front-running and stock market liquidity
- 8 Auction markets, dealership markets and execution risk
- Discussion
- 9 The impact of a new futures contract on risk premia in the term structure: an APT analysis for French government bonds
- PART III BANKS
- Index
Summary
Introduction
When a stockbroker receives an order from a client, he may have an incentive to trade on his own account to take advantage of the information contained in the order. When he does so before executing the client's order, he is ‘front-running’ the order, a practice which has become the object of increasing debate and attention by stock exchange regulators. The main reason for this increasing interest is that the introduction of dual-capacity trading in many stock exchanges has eliminated the traditional barriers between the brokerage and dealership function: the same intermediaries are allowed to collect orders from clients and trade on their own account as dealers. In London the ‘Big Bang’ in 1986 eliminated the distinct roles of ‘jobbers’ and ‘brokers’. In Paris and Madrid, the reforms of 1988 and 1989 respectively allowed stock exchange members also to deal on their own account. In other countries, such as Italy and Germany, the major banks have traditionally dealt in dual capacity on a massive scale, acting as the main conduit for public orders and as the most important players in the stock market, either via representatives (in Germany) or via exchange members (in Italy). In these two countries, the opportunity to front-run clients' orders has thus always been open to banks.
By front-running a broker–dealer can exploit privileged information about the order flow that is about to come onto the market.
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- Chapter
- Information
- Financial Markets Liberalisation and the Role of Banks , pp. 178 - 199Publisher: Cambridge University PressPrint publication year: 1993
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