Front Running
What Is Front Running?
Front running is an illegal and unethical trading practice in which a broker or financial professional executes trades for their own account before carrying out large client orders that are expected to affect market prices.
Because large trades can influence prices, front running allows the broker to profit from the anticipated market movement.
Why It Matters
Front running undermines trust in financial markets and violates regulations designed to protect investors. It creates an unfair advantage for insiders who misuse confidential client information.
Regulators closely monitor markets to detect and prevent this practice.
How Front Running Works
Front running typically involves:
- receiving a large client trade order
- predicting how the order will impact the market price
- executing personal trades before the client order
- profiting from the price movement caused by the client trade
This behavior is prohibited in most financial markets.
Example
A broker learns that a large institutional investor plans to purchase a significant amount of stock. Before executing the client’s order, the broker buys shares personally, expecting the price to rise.
Front Running vs Insider Trading
- Front running involves trading ahead of client orders.
- Insider trading involves trading based on non-public corporate information.
FAQs About Front Running
Is front running illegal?
Yes. It violates securities laws in many countries.
Who regulates front running?
Regulatory bodies such as the SEC and FINRA monitor trading practices.
How is front running detected?
Through surveillance systems that track suspicious trading patterns.
Related Terms
