The Temptation of Front-Running

October 1988

Not everyone believes the new legal language is a step forward. Robert Kanter, managing general partner of Arbco Limited Partnership in New York, is one of the most outspoken critics of intermarket front-running. (Kanter includes pre-positioning on futures exchanges in stock-index futures to facilitate customer programs.) He estimates the hidden commission or front-running cost to the public "involves billions of dollars."

Kanter remains adamantly opposed to legalizing pre-positioning. "I was never concerned about the overt front-runner, because the market has a propensity to adjust for that," he said. "My concern is that pre-positioning is without any potential legislation. Individuals are entering pre-positioning transactions without any knowledge of impending transactions. I believe we're now in a hybrid market, a combined dealer-auction market." Kanter thinks that is unfair: "One of the dealer's principal sources of revenue is how much he has taken from the other side. That language is validating it. Before, the issue of pre-positioning was up for grabs. Now it's legitimized. If this were a dealer market, that would be okay. But bids and offers should be exposed to everyone, not disguised form the public."

October 1988 INTERMARKET

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