Trading Ahead
Contents
Navigating the Intricacies of Trading Ahead in Financial Markets
Understanding Trading Ahead
Trading ahead is a practice in financial markets where a market maker conducts trades using the firm's account instead of matching available bids and offers from other market participants. This action, deemed a violation of FINRA regulations, occurs when a market maker enters proprietary orders ahead of or along with customer orders, granting them an unfair advantage.
Exploring Market Making
Market makers, also known as specialists, play a crucial role in facilitating secondary market trading by matching buyers and sellers. However, trading ahead occurs when a market maker trades from their own account to complete a transaction, disregarding available unexecuted orders from investors that could be filled at the same price or better.
Market Rules and Regulations
Trading ahead was initially prohibited by NYSE Rule 92, later replaced by FINRA Rule 5320, also known as the 'Manning rule.' This rule outlines detailed prohibitions and exceptions, requiring market makers to have documented policies and adhere to compliance guidelines. Exceptions include large orders, riskless principal exceptions, and ISO exceptions.