Interpositioning is occasioned by a pair of matchable limit orders for some security, say a bid limit order at $100 and an offer limit order at $99.
Attorney for the Southern District of New York indicted fifteen individuals working for specialist firms for fraud under Section 10(b) of the Securities Exchange Act of 193449 and Rule 10b-5 (50) for interpositioning.
The courts generally found that interpositioning did not violate Rule 10b-5 because the government could not prove deception (53) or any untrue or misleading statements (54)--or statements made misleading by an omission.
Yet, before the interpositioning cases went to trial, the SEC found interpositioning to be a violation of Rule 10b-5.
Before moving on to when fiduciary duties are created (80) and what fiduciary duties entail, (81) it is useful to set the stage by considering two practices similar to interpositioning that are outlawed: trading ahead (82) and insider trading.
Interpositioning appears to be very similar to a prohibited practice called trading ahead.
Although trading ahead has been likened to interpositioning, (99) Dial differs from the interpositioning prosecutions in that Dial solicited orders, (100) while interpositioning does not require any solicitation, since limit orders come to specialists as a matter of course.
Another analogy to interpositioning is insider trading.
Finally, it is worthwhile to consider specialist interpositioning as it affects the wider economy.
Interpositioning has been called a form of arbitrage.