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Strategies & Market Trends : DAYTRADING Fundamentals
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To: LPS5 who wrote (7459)3/15/2000 11:07:00 PM
From: Dan Duchardt  Read Replies (1) of 18137
 
LPS5,

The market maker (or whatever trader handling the order) has an obligation to take care of the customers' order first. Frontrunning is a violation of NASD rules, and Head Traders plus Compliance Departments keep an eye on that sort of thing by monitoring order tickets and electronically auditing purchases and sales.

Could you please clarify this "frontrunning" issue by considering the following situations.

A MM is engaged in inventory trading, and let's say he is at the moment content to add to inventory at 50, and sell from inventory at 50 1/4, so he publishes his quotes as 50 x 50 1/4. Let's say the inside market is 50 1/16 x 50 1/4. I assume that if a client sends a limit order to sell at 50 3/16 the MM is obligated to represent the client's order before selling any more of his inventory at 50 1/4, and before lowering the offer on his inventory to 50 3/16 ahead of his clients order.

Now let's say that instead of splitting the spread, a client sends a limit order to sell at 50 1/2 (away from the market).

1) Is the MM obligated to cease selling his inventory at 50 1/4 and represent his client's order at 50 1/2?
2) If the market rises to a point where the MM wishes to offer his own inventory at 50 1/2 must he first represent the clients order at that price?

TIA

Dan
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