Front Running

Understanding Front Running in Trading

Let's delve into the concept of Front Running, a term often heard in the context of trading. In simple words, Front Running is a controversial practice where a broker executes orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers. In essence, the broker is 'running in front' of the customer order, hence the term "Front Running".

How does Front Running work?

To further comprehend the concept of Front Running in trading, let's take an example. Imagine an investment broker, who has advance insight into a large pending order from a customer to purchase a high volume of shares. Anticipating that this order will likely increase the share price, the broker first buys some of that share for its own account. Later, it executes the customer's order, which potentially increases the share price. The broker then sells their own shares at this higher price, thereby making profit. This action of exploiting prior knowledge is what we call Front Running.

Is Front Running legal?

Given that it involves profiting from privileged information, you may be wondering, is Front Running legal? The truth is, in most jurisdictions, Front Running is considered unethical and is illegal. It is frowned upon because it can distort the market and is unfair practice to other traders.

Front Running vs Insider Trading

We alluded to Front Running profiting from privileged knowledge, which may bring to mind another trading term: Insider Trading. While both practices might appear similar, there's a key difference. Front Running typically involves the execution of orders based on advance knowledge of pending trades, whereas Insider Trading involves trading based on otherwise undisclosed, material information about a company. Both practices are generally considered illegal and unethical.

Front Running: Conclusion

In conclusion, while Front Running might seem like a quick route to profits in trading, it is considered unethical and illegal in most trading environments. As investors, it's important to understand such terms and practices in order to make informed decisions and navigate the trading world efficiently.