What is Front Running?
Front running is an unethical practice in which a broker or trader buys or sells securities ahead of a large order in order to profit from the anticipated price movement. This practice is considered illegal as it gives the front runner an unfair advantage over other market participants.
How Does Front Running Work?
Front running typically occurs when a broker or trader receives an order from a client to buy or sell a large quantity of securities. Instead of executing the order immediately, the broker or trader may first buy or sell the same securities for their own account, anticipating that the price will move in a favorable direction once the large order is executed.
Examples of Front Running
One example of front running is when a broker receives an order from a hedge fund to buy a large amount of a particular stock. The broker may buy some of the stock for their own account before executing the hedge fund’s order, causing the price to increase and allowing the broker to profit from the price movement.
Case Studies
In 2014, the New York Attorney General filed charges against a high-frequency trading firm for front running. The firm allegedly used information about large institutional orders to trade ahead of them, profiting from the price movements caused by the orders.
Statistics on Front Running
According to a survey conducted by the CFA Institute, 63% of respondents believe that front running is a significant problem in the financial industry. This highlights the need for stricter regulations and enforcement to prevent front running practices.
