The most common example of front running occurs when a broker, upon receiving a client’s large buy order for a specific stock, buys shares of the same stock before executing the client's order. Once the client’s large order is placed, the stock price typically rises due to increased demand, allowing the broker to sell their previously purchased shares at a higher price, thereby making a profit. This practice distorts the market and disadvantages other investors by inflating stock prices artificially.
Front running is not limited to equities but can occur in any asset class, including commodities, foreign exchange, and even cryptocurrencies. It can also happen in different forms, such as through algorithmic trading, where trading bots are programmed to detect large orders and act before the orders are fully executed. In some cases, front running involves insiders leaking sensitive information to other parties, who then trade on it.
Globally, regulators such as the Securities and Exchange Board of India (SEBI) and the U.S. Securities and Exchange Commission (SEC) strictly prohibit front running. Violators can face severe penalties, including fines, suspension of licenses, and criminal prosecution. To curb this malpractice, financial institutions are required to implement stringent internal controls and maintain ethical trading practices to ensure client orders are executed fairly and transparently.
Front running damages investor confidence and market integrity. It creates an uneven playing field where insiders gain at the expense of ordinary investors. Therefore, financial regulators emphasize maintaining a fair and transparent trading environment to protect investors and promote trust in the financial system.
