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How can we tell the difference between profits from market-making and front-loading?

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.
by Migeru (migeru at eurotrib dot com) on Tue Jul 14th, 2009 at 04:15:24 PM EST
[ Parent ]
To disentangle tailgating, normal trading, market making and front-loading we'd have to raid Goldman Sachs, I guess.

I'm not so much addressing the illegality of the practice (interesting enough, in itself) as the implications for the overall cost (overhead) of the financial system.

To go into more speculation, I don't know what Goldman Sachs charges for executing program trades. I guess it ends up as pennies. These are costs of doing transactions. People who trade through Goldman Sachs should know that the costs don't end there. There's tailgating, possible front-loading, a range of practices to steer or manipulate the market (the difference may be hard to tell). These are hidden transaction costs of doing business through Goldman Sachs. They may not affect your individual trade negatively, but they extract rents from the market that would not exist if there were no dominant firm.

by nanne (zwaerdenmaecker@gmail.com) on Tue Jul 14th, 2009 at 04:32:15 PM EST
[ Parent ]
You can assume costs (interest, commissions) are measured in basis points (0.01%).

The peak-to-trough part of the business cycle is an outlier. Carnot would have died laughing.
by Migeru (migeru at eurotrib dot com) on Tue Jul 14th, 2009 at 04:36:44 PM EST
[ Parent ]
During the bubble (and during the early bust, when people still believe that happy times can come again if just the "organised support" - read: Large-scale manipulation - arrives in time), people do not mind manipulations, as long as they think they have a chance to get in on the action.

Galbraith has (as usual) a couple of pithy quotes about that, but my copy of The Great Crash of 1929 is at a friend's house right now...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jul 14th, 2009 at 04:47:14 PM EST
[ Parent ]
How can we tell the difference between profits from market-making and front-loading?

Simple, presuming you meant front-running.  The exchange pays them ~1/4 cent per trade "to provide liquidity."  Subtract that out.  GS should be paying the exchange for the "cover" that this "liquidity provision" service affords, IMO.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 15th, 2009 at 02:10:41 PM EST
[ Parent ]
AIRC, the quoted figure was 1/4 cent per trade for providing liquidity.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 15th, 2009 at 02:12:01 PM EST
[ Parent ]

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