Specialists and Pigs

Stock Basics - How Stocks Trade

"The NYSE is the first type of exchange (as we referred to above), where much of the trading is done face-to-face on a trading floor. This is also referred to as a 'listed' exchange. Orders come in through brokerage firms that are members of the exchange and flow down to floor brokers who go to a specific spot on the floor where the stock trades. At this location, known as the trading post, there is a specific person known as the 'specialist' whose job is to match buyers and sellers. Prices are determined using an auction method: the current price is the highest amount any buyer is willing to pay and the lowest price at which someone is willing to sell [-- or the price influenced by the specialist buying or selling with advance knowledge of a block transaction for his own firm's account]. Once a trade has been made, the details are sent back to the brokerage firm, who then notifies the investor who placed the order. " [1]

Specialists who engage in "interpositioning," "front-running," and "trading ahead of investor orders" are also pigs.

Front running

"Entering into an equity trade, options or futures contracts with advance knowledge of a block transaction that will influence the price of the underlying security to capitalize on the trade. This practice is expressly forbidden by the SEC. Traders are not allowed to act on nonpublic information to trade ahead of customers lacking that knowledge." Quoted from Campbell R. Harvey's Hypertextual Finance Glossary

Trading Ahead

"A New York Stock Exchange rule violation. Basically, in this situation the specialist puts their firm's interest ahead of the investor's interest. Consider an example. Suppose that the specialist simultaneously receives orders from two investors, one to sell 5,000 shares of XYZ and one to buy 5,000 shares of XYZ. Normally, these orders are matched. However, suppose that the specialist substitutes (matches) her own firm's 5,000 shares of XYZ. That is, the firm's own shares are sold instead of the order that came in previously. This disadvantages the buyer because the very next transaction will be the order to sell 5,000 shares of XYZ (which will likely put downward pressure on the price). Notice that the firm has bailed out of XYZ at a higher price than if the order was reversed (the specialist's firm selling afterwards)." Quoted from Campbell R. Harvey's Hypertextual Finance Glossary