Front-running
Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
Front-running is an illegal practice. A person learns that a big client order is coming and trades before it, to profit from the price move that the big order will cause. For example, a dealer who knows a fund is about to buy a large number of shares buys those shares first, because the fund's order will push the price up. This cheats the client and hurts the fairness of the market. In India, it is banned under SEBI's PFUTP Regulations 2003 (Prohibition of Fraudulent and Unfair Trade Practices).
Example
In 2022, there were cases where mutual fund dealers traded ahead of their own funds' orders. In response, SEBI in 2024 required asset management companies (AMCs) to set up an institutional mechanism to detect and prevent front-running.
Don't confuse with
- Insider trading: this means trading on unpublished price-sensitive information (UPSI) about the company itself, such as its results or a merger. Front-running uses advance knowledge of someone else's pending order.
Related concepts
- Dividend
- Bonus issue
- Stock split
- Buyback
- Minimum public shareholding
- Delisting
- Insider trading
- Short selling
- Securities Lending and Borrowing