Economics at your fingertips  

How brokers can optimally plot against traders

Manuel Lafond

Papers from

Abstract: Traders buy and sell financial instruments in hopes of making profit, and brokers are responsible for the transaction. There are several hypotheses and conspiracy theories arguing that in some situations, brokers want their traders to lose money. For instance, a broker may want to protect the positions of a privileged customer. Another example is that some brokers take positions opposite to their traders', in which case they make money whenever their traders lose money. These are reasons for which brokers might manipulate prices in order to maximize the losses of their traders. In this paper, our goal is to perform this shady task optimally -- or at least to check whether this can actually be done algorithmically. Assuming total control over the price of an asset (ignoring the usual aspects of finance such as market conditions, external influence or stochasticity), we show how in quadratic time, given a set of trades specified by a stop-loss and a take-profit price, a broker can find a maximum loss price movement. We also look at an online trade model where broker and trader exchange turns, each trying to make a profit. We show in which condition either side can make a profit, and that the best option for the trader is to never trade.

Date: 2016-04, Revised 2022-06
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Papers from
Bibliographic data for series maintained by arXiv administrators ().

Page updated 2022-06-03
Handle: RePEc:arx:papers:1605.04949