Front running, also known as tailgating, is the practice of entering into a trade to capitalize on advance, nonpublic knowledge of a large pending transaction that will influence the price of the underlying security. In essence, it means the practice of engaging in a personal or proprietary securities transaction in advance of a transaction in the same security for a clients account. Front running is considered a form of market manipulation in many markets. Here are some key points to understand about front running:
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Front running is the illegal practice of purchasing a security based on advance non-public information regarding an expected large transaction that will affect the price of a security.
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Front running is considered as a form of market manipulation and insider trading because a person who commits a front running activity expects security’s price movements based on the non-public information.
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Front running is usually committed by brokers or brokerage firms and is considered the most common kind of front running.
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Front running can be carried out by any trader or intermediary who executes financial activities on behalf of a client.
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Front running is prohibited by SEC Rule 17(j)-1, which sets out the ethical requirements for portfolio.
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Front running is commonly confused with insider trading, but they are distinct. Insider trading refers to a company insider who trades on advanced knowledge of corporate activities.
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Front running can expose significant financial, operational, and reputational risk if the activity is detected by regulators.
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Front running is a market abuse behavior, also known as pre-hedging or pre-positioning, that happens when a broker or person responsible for executing orders obtains knowledge about a forthcoming order on a financial instrument that is going to hit the market.
In summary, front running is an illegal practice that involves trading on advance non-public information regarding an expected large transaction that will affect the price of a security. It is considered a form of market manipulation and insider trading, and it can expose significant financial, operational, and reputational risk if the activity is detected by regulators.
