What Is Front Running?
Front running is a dishonest trading tactic in which a broker, trader, or financial institution trades based on prior, non-public knowledge of a large order from a customer that is to be placed shortly. This enables the trader to gain from price movements before executing the client's trade.
How Front Running Works?
- A broker or trader discovers a large impending trade (e.g., a large buy order by an institutional investor).
- They order first for themselves, knowing that the big trade will push the price up.
- The big trade goes through, sending the price up.
- Front-runner sells at a profit, profiting from the price action triggered by the client's order.
Why Is Front Running Illegal?
- Market Unfairness: Provides an unfair advantage to insiders.
- Fiduciary Duty Breach: Brokers must take the client's interest ahead of personal profits.
- Manipulates Market Prices: Generates false demand and skews stock prices.
- Regulatory Consequences: Regulators such as SEBI punish culprits with fines, bans, and legal proceedings.
Key Takeaways
Front-running is a fraudulent and illegal trade of securities where brokers or traders act on non-public information about large, impending trades to execute their trade first to benefit from price movement. This wrongful profit erodes market integrity, violates the fiduciary owed to the client, and manipulates the price of the shares, leading to heavy penalties from regulators such as SEBI.
