Ginzy Trading Definition

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Ginzy Trading Definition

What Is Ginzy Trading?

Ginzy trading is the practice of selling a portion of an order at the offer price and then reselling the rest at the lower bid price to the same broker. The idea is to have an order with an average price that falls midway between the existing bid-ask spread.

This approach, which was formerly common in floor-trading venues, has mostly gone out of favor owing to regulatory scrutiny and the fact that bid-ask spreads now trade in pennies. Furthermore, employing Ginzy trading to manipulate prices is now prohibited on numerous exchanges.

Key Takeaways

  • Ginzy trading is breaking an order into two halves, one at the offer price and one at the bid price.
  • As a pricing enhancement for the client, the aim is to obtain an average fill that is greater than the market bid.
  • While this was formerly a prevalent technique on physical exchange trade, computerized trading and regulatory supervision have significantly curtailed its usage.
  • Ginzy trade is now mostly illegal under the Commodities Trading Act.
  • As bid-ask spreads are quoted in cents, this method is becoming more outdated.

Understanding Ginzy Trading

Ginzy trading was initially undertaken largely to attain an average price for the client within the market’s preset increments, or ticks. A tick is a unit of measurement for the smallest upward or decrease change in the price of an investment. A tick may also refer to the movement in a security’s price from trade to trade.

Ginzy trading is typically regarded unethical, and the activity is illegal if it is the result of broker collusion. Ginzy trading is used by brokers to attempt to evade restrictions that ban trading a single order at several increments. The resultant practice, however, continues to violate the regulations that prevent a broker from quoting various rates on the same transaction.

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Brokers are normally required by exchange laws to seek the best possible price for their clients and to execute all deals on the open market. Ginzy trading has become less necessary since exchanges have reduced tick sizes from 1/8th of a dollar ticks in the past to the one-cent ticks that many instruments trade in today. The increased usage of computerized and over-the-counter order matching systems also aids in the prevention of unlawful trading.

Ginzy Trading and the Commodity Exchange Act

Ginzy trading has been declared by regulators to be a non-competitive trading conduct that violates the Commodity Exchange Act.

The Commodity Exchange Act, or CEA, adopted in 1936, governs all futures trading operations in the United States. The CEA, which effectively superseded the Grain Futures Act of 1922, is meant to prevent and reduce barriers to interstate commodity trading by regulating commodity futures exchange activities. The CEA’s policies restrict or prohibit short selling and prevent the risk of manipulation. The CEA also provided the legal foundation for the Commodity Futures Trading Commission (CTFC).

The CEA empowers the Commodity Futures Trading Commission to impose trading rules. Because Ginzy trading is a non-competitive trading technique, it is prohibited under these laws, which encourage competitive and efficient futures markets. The CFTC’s laws also safeguard investors against manipulation, abusive trading practices, and fraud.

The CFTC is divided into five committees, each led by a commissioner chosen by the president and confirmed by the Senate.

Ginzy trading peaked during the 1980s and the early 2000s, when tick sizes were quoted in fractions. The decimalization of stock quotations made this method much less viable.

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Example of Ginzy Trading

Assume XYZ stock is listed at $48.00 – $49.00, with a bid-ask spread of $1.00. Assume that the tick size for this fictitious stock is $0.50. A buyer wishes to purchase 200 shares of XYZ, and numerous sellers have shown an interest in giving the mid-market price of $48.50. A seller is eager to offer XYZ to the buyer but wants a higher price. For an average price of $48.50, the seller might offer 100 shares for $48.50 and sell the remaining 100 shares at $48.00.

This pricing is a win for both the buyer (who could have been ready to pay $48.50) and the seller (who might have been willing to sell for $48.00). The seller was able to locate a price that existed between the minimum tick size for XYZ stock by dividing the order into two pieces, resulting in a Ginzy deal.

Why Do Traders Split Orders?

For a variety of reasons, traders may divide bigger orders into smaller ones. One possibility is to avoid moving the market with a hefty order. If a seller has to sell a large number of shares at once, the price may be artificially depressed, resulting in a poor fill. A succession of smaller sell orders will have less of an instant effect. A trader may also divide an order in order to acquire a better price or an average price over a period of time.

How Does a Bid-Ask Spread Work?

The bid-ask spread is the difference between the highest price someone is willing to pay for a stock and the lowest price someone is willing to sell it for. This price quotation might be established by a market maker (MM) who is ready to take both sides of the market, or it could be the outcome of several buyers and sellers. The narrower the spread, the more liquid and active the stock. Instead, wide spreads suggest a lack of liquidity.

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How Do People Profit From the Bid-Ask Spread?

A market maker is a trader who actively posts both a bid and an offer in a stock. The market maker will earn from the spread between the two prices if they can regularly purchase at the bid and sell at the offer.

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