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How brokers can optimally plot against traders

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  • Manuel Lafond

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.

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  • Manuel Lafond, 2016. "How brokers can optimally plot against traders," Papers 1605.04949, arXiv.org, revised Jun 2022.
  • Handle: RePEc:arx:papers:1605.04949
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    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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