Trading and Exchanges Chapter 11: Front-Runners and Order Anticipators
Chapter 11 is about the shady side of trading. Harris introduces order anticipators: people who profit not by knowing what a stock is worth, but by figuring out what other traders are about to do and trading before them. They are parasites. Harris uses that word deliberately. No better prices. No liquidity. They just extract money from other people’s trades.
Three flavors: front runners, sentiment-oriented technical traders, and squeezers.
Front Runners
Front runners find out someone is about to buy or sell, and they trade first. They profit when the original order moves the price.
Harris gives a great example. Rob carries paper orders from the phone booth to the broker in a futures trading pit. His buddy Nate trades in that pit. They set up signals. If Rob carries a big buy order, he puts his pen behind his ear or glances at the clock a certain way. Nate sees the signal, buys contracts immediately, profits when the broker pushes the price up filling the real order. They split profits. Illegal, obviously.
But not all front running is illegal. Rifka, a floor trader, watched broker Jon for years and noticed he behaves slightly differently with big orders versus small ones. She cannot even describe what she sees. She just knows from experience. She front-runs his orders. Completely legal. She earned that edge through observation.
Quote Matching (Penny Jumping)
This is a clever variation. Instead of front-running aggressive traders, quote matchers front-run passive ones. Jose puts up a big limit buy at 20 pesos. Maria sees it and places her own buy at 20.01. She gets filled first. If the price goes up, Maria profits. If it drops, she sells to Jose at 20 and loses only 1 centavo. Unlimited upside, capped downside.
But Jose can fight back. He places a big buy order as bait. When Maria jumps in front, Jose immediately sells to her and cancels his buy order. Now Maria is stuck with shares and no safety net. Beautiful trap.
Since U.S. stocks moved to decimal pricing, this is called penny jumping. You only need to improve by one cent for priority.
Why Front Running Hurts Everyone
Front runners are a net negative. The proof is simple: they never show up when there is nobody to front-run. They bring nothing new. Worse, they drive away the very orders they feed on.
There is also a counterintuitive long-term effect. Front-running informed traders speeds up price discovery today. But it reduces informed traders’ profits, so fewer people bother to do research. Less research means less informed prices over time. You win the battle but lose the war.
Sentiment-Oriented Technical Traders
These are like front runners but work with predictions instead of inside knowledge. They try to predict what uninformed traders will decide to do next.
The January Effect is a classic example. Stock prices historically rose more in January than any other month (about 0.85% more over 75 years from 1926 to 2000). One theory: year-end bonuses and pension contributions hit brokerage accounts in January, pushing markets up. Sentiment traders who figure this out buy in December before the wave.
These traders also ride asset bubbles. Harris mentions Iomega, the Zip drive company. It went up over 1000% in one year, reaching a market cap that was 10% of IBM. Then crashed by two-thirds. Traders who recognized the herd behavior could profit, but only if they got out in time.
Sentiment trading works best in hard-to-value instruments. If something is easy to value, value traders correct mispricings fast. Internet stocks, emerging market bonds, anything where fundamental value is uncertain, that is where sentiment traders find opportunities.
Squeezers
Squeezers are the most aggressive parasites. They corner the market.
Harris tells the story of Benjamin P. Hutchinson and the Great Wheat Corner of 1888. Hutchinson bought thousands of September wheat futures while simultaneously buying up the actual wheat in Chicago’s grain elevators. When contracts came due, short sellers needed wheat to deliver. Hutchinson had it all. Between September 22 and 30, wheat doubled from $1 to $2. He made millions by setting his own prices.
There is also the penny stock squeeze. Ian correctly identifies that XYZ is overpriced and shorts it. But the stock promoters squeeze him by buying shares to push the price up, then recalling the shares Ian borrowed. Ian was right about the stock being worthless. Still lost money.
Harris compares squeezing to “shooting the moon” in Hearts. Collect all the bad cards and everyone else loses. Miss even one, you lose badly. Same with corners. You need total control or you get crushed.
Gunning the Market
One last dirty trick. If you know where traders placed their stop-loss orders, you can push the price to trigger them. P.J. knows short sellers have stop-loss buys at $5.00 for silver futures, currently at $4.96. She buys aggressively to push the price to $5.00, triggering all the stops. The stops create more buying, and P.J. sells her position into that frenzy. Price drifts back to $4.96 afterward. Quick profit, nearly impossible to prosecute.
The Bottom Line
Order anticipators survive by feeding on other traders’ predictability. The defense is simple in theory but hard in practice: hide your intentions, protect your information, trade in liquid markets, and always have multiple exit options. If someone can predict what you are about to do, they will find a way to profit from it at your expense.
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