Front-Running is currently a legal tactic in trading. GS seems to be very efficient at it. And the 1/8th point higher you have to pay when you buy a stock isn't that much anyways.
Front running your client's trades is completely illegal. Front running on an exchange is not even possible unless you hack the exchange computers (also illegal). The first person to place an order at a given price on a given exchange wins.
The only sort of front running which is legal is guessing ahead of time what a third party might do and placing orders before they actually do it. I.e., you might guess that Apple plans to buy Yahoo and buy Yahoo shares in anticipation of this event. Do you have evidence GS has done this?
http://en.wikipedia.org/wiki/Regulation_NMS
The only time this rule fails to apply is under extremely high latency scenarios. For example, last thurs when nasdaq left the machines on but NYSE switched to human matching, RegNMS was suspended.
[1] I'm undecided about whether I think front running is fair, but flash orders are a separate issue.
I'm undecided about whether I think front running is fair
This is a red flag that no one here should be asking you for moral advice.
Flash trading: Joe wants to buy shares at price 10 or better and places an order on NYSE. The best ask on ARCA is 9.99, but the best ask on NYSE is 10. NYSE gives me the option of filling Joe's order at price 9.99 (rather than routing the trade to ARCA), saving Joe the cost of routing.
Flash trading and front running are just not the same thing. Flash trading only happens to traders who chose for their orders to be flashed. All flash trading does is moves the trade from ARCA to NYSE.
You see shares costing 9.80, so you buy it up quickly, and sell it to Joe for 10, making a profit of 0.20 per share while driving up prices for Joe.
That is front running.
A flash trade gives Goldman the opportunity to fill Joe's order at the NBBO price before it is routed to another exchange. It does absolutely nothing else. The person receiving the flash is even prohibited from making offers on that security on other exchanges for a few milliseconds after receiving the flash.
This gives Goldman an advantage over other high frequency traders since it gives Goldman a higher fill rate, which is definitely unfair.
If Joe wanted to fill the order himself on a darkpool, he would not have asked the exchange to flash his order.
For good measure read also Hellen’s article [2].
[1] http://www.youtube.com/watch?v=V5G7zBWMpIs&feature=playe...
[2] http://www.huffingtonpost.com/ellen-brown/stock-market-colla...
In the old days, market makers could potentially front run by physically ignoring the proper market ordering (i.e., in a physical trading pit), perhaps when the broker ahead of them in the queue is distracted with another trade. This is completely impossible in an electronic exchange. There is no "front run this trade" message in either FIX or OUCH (the wire protocols used for trading).
Go to the wikipedia page for front-running. The first sentence says that it's illegal. The first sentence. And indeed it is. Thus, it's quite a claim to say that GS make money from it.
Marltod, where did you get all this from?