What Is Ginzy Trading?
Ginzy trading is the practice of selling part of an order at the offer price and then the remainder to the same broker at the lower bid price. The goal is to achieve an average price on the order that falls somewhere in between the current bid-ask spread.
Once popular in floor-trading venues, this practice has largely fallen out of fashion due to regulatory scrutiny and the fact that bid-ask spreads now trade in pennies. Moreover, using Ginzy trading to game prices is now illegal on many exchanges.
- Ginzy trading involves splitting an order partially on the offer and partially at the bid price.
- The goal is to achieve an average fill that is higher than the market bid as a price improvement for the customer.
- While this practice was once common on physical exchange trading, electronic trading and regulatory oversight have greatly reduced its use.
- Today Ginzy trading is largely prohibited under the Commodities Trading Act.
- The practice is also increasingly obsolete as bid-ask spreads are quoted in pennies.
Understanding Ginzy Trading
Ginzy trading was originally performed primarily to achieve an average price for the customer within the predefined increments, or ticks, in which the market is traded. A tick is a measure of the minimum upward or downward movement in the price of a security. A tick can also refer to the change in the price of a security from trade to trade.
Ginzy trading is generally considered unethical and the practice is unlawful if such a trade is caused by collusion among brokers. Brokers engage in Ginzy trading to try to avoid rules that prohibit trading a single order at various increments. However, the resulting practice still breaks the rules that prohibit a broker from quoting different prices on the same order.
Exchange rules typically require that brokers seek to get the best price possible for their customers and that they make all trades on the open market. The need for Ginzy trading has declined over time as exchanges have decreased tick sizes from the 1/8th of a dollar ticks seen in the past down to the one-cent ticks that many instruments trade in today. Increased use of electronic and over-the-counter order matching systems also helps to prevent illegal trades.
Ginzy Trading and the Commodity Exchange Act
Regulators have deemed Ginzy trading to be a non-competitive trading practice that violates the Commodity Exchange Act.
The Commodity Exchange Act, or CEA, enacted in 1936, provides federal regulation for all futures trading activities. The CEA essentially replaced the Grain Futures Act of 1922 and is intended to prevent and remove obstructions to interstate commerce in commodities by regulating transactions on commodity futures exchanges. The regulations within the CEA limit or abolish short selling and eliminate the possibility of manipulation. The CEA also established the statutory framework under which the Commodity Futures Trading Commission (CTFC) operates.
The CEA gives the Commodity Future Trading Commission the authority to establish regulations in trading. These regulations promote competitive and efficient futures markets, and as such prohibit the use of Ginzy trading as it is a non-competitive trading practice. The regulations put forth by the CFTC also protect investors against manipulation, abusive trade practices, and fraud.
The CFTC has five committees, each headed by a commissioner, who is appointed by the president and approved by the Senate.
Ginzy trading was at its peak from the 1980s to early 2000s when tick sizes were quoted in fractions. Decimalization of stock quotes greatly reduced the viability of this practice.
Example of Ginzy Trading
Imagine that XYZ stock is quoted as $48.00 - $49.00, giving it a $1.00 wide bid-ask spread. Assume also that the tick size for this hypothetical stock is $0.50. A buyer is interested in buying 200 shares of XYZ and several sellers have expressed interest in offering the mid-market level of $48.50. A seller is motivated to sell XYZ to the buyer but wants a better price. The seller could offer 100 @ $48.50 and sell the remaining 100 shares at $48.00, for an average price of $48.25.
This price is an improvement for the buyer (who may have been willing to pay $48.50) and the seller (who may have been willing to sell at $48.00). By splitting the order into two parts, the seller was able to find a price that existed in between the minimum tick size for XYZ stock, making it a Ginzy trade.
Why Do Traders Split Orders?
Traders may break up larger orders into a series of smaller ones for several reasons. One could be to avoid moving the market on a large order. If a seller needs to get rid of a large number of shares all at once, it can artificially depress the price and result in an inferior fill. A series of smaller sell orders is less likely to have the same immediate impact. A trader may also split an order in an effort to achieve a better price or to obtain an average price over some period of time.
How Does a Bid-Ask Spread Work?
The bid-ask spread represents the highest price someone is willing to pay for a stock along with the lowest price that someone is willing to sell it. This price quote may be set by a market maker (MM) who is willing to take both sides of that market, or the result of different buyers and sellers. The tighter the spread, often the more liquid and active the stock is. Wide spreads instead indicate a lack of liquidity.
How Do People Profit From the Bid-Ask Spread?
A trader who actively posts both a bid and an offer in a stock is known as a market maker. If the market maker can consistently buy at the bid and sell at the offer, they will profit from the spread between the two prices.