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 it 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.
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 help to prevent illegal trades.
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 on 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.