Front Running

What is 'Front Running'

Front running is the unethical practice of a broker trading an equity in his personal account based on advanced knowledge of pending orders from the brokerage firm or from clients, allowing him to profit from the knowledge. It can also occur when a broker buys shares in his personal account ahead of a strong buy recommendation that the brokerage firm is going to make to its clients.

BREAKING DOWN 'Front Running'

In the context of stock trading, front running is the practice of stepping in front of orders placed or about to be placed by others to gain a price advantage. For example, a broker receives an order from a client to buy 500,000 shares of XYZ Company. He holds it until he executes the purchase of a smaller order of the same stock in his own account. He then executes the client’s larger order, which drives up the share price. The broker can then sell his share, making a profit at the direct expense of the client. That form of front running is not only unethical, it is illegal. 

Index Front Running

Index funds, which have enjoyed many years of outperformance at the expense of active traders, have become their targets for another type of front running. Index funds generally try to track an index by mirroring its portfolio. Because the index changes its composition of stocks periodically, traders can anticipate when an index fund is going to update its portfolio, and step in front of the trade. For example, in 2015, American Airlines Group Inc. was added to the Standard & Poor’s 500 index (S&P 500 index). The minute the addition was announced four days earlier, HFT traders were able to start buying up shares in advance of the rest of the market and benefited from an 11% gain by the time it was actually added to the index.

RELATED TERMS
  1. Firm Order

    1. A market order to buy or sell a security for a brokerage's ...
  2. Discretionary Account

    An account that allows a broker to buy and sell securities without ...
  3. Give Up

    A procedure in securities or commodities trading where the executing ...
  4. Executing Broker

    The broker or dealer that finalizes and processes an order on ...
  5. Cancellation

    Notice by a broker informing his or her client that an erroneous ...
  6. Account Executive

    This term refers a person who has primary responsibility for ...
Related Articles
  1. ETFs & Mutual Funds

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
  2. Trading

    Front Running and the HSBC Trading Scandal (HSBC)

    Two HSBC executives have been accused of front running by the SEC. What is front running and are regulators cracking down on it?
  3. Financial Advisor

    Deal Effectively With Difficult Clients

    Learn how to tame the most shrewish clients with these simple methods.
  4. Professionals

    Tips For Boosting Your Business

    Find out how butter up new clients, build up old files and better your bottom line.
  5. Markets

    Understanding Order Execution

    Find out the various ways in which a broker can fill an order, which can affect costs.
  6. Trading

    Is Your Broker Acting In Your Best Interest?

    Learn the clues you'll need to determine whether you've chosen a reputable professional.
  7. Trading

    Brokers: Do You Want To Sell Stocks Or Insurance?

    Know the difference between working as a broker or an insurance rep.
  8. Managing Wealth

    Picking Your First Broker

    If you're a rookie investor, your first big investment decision should be an informed one.
  9. Retirement

    Are You A Good Client?

    Investing is a team sport in which the client and financial professional must work together.
  10. Financial Advisor

    4 Dishonest Broker Tactics And How To Avoid Them

    Protecting yourself from dishonest broker practices means knowing how to spot them.
RELATED FAQS
  1. Do I always need to use a stock broker?

    Do I need a stock broker to buy stocks for myself, even if I get a stock brokers license? Or is there a rule that makes it ... Read Answer >>
  2. What is the minimum amount that I need to buy an Index Fund ?

    This will be my first time as investor. ... Read Answer >>
  3. How do I place an order to buy or sell shares?

    Read a brief overview of how to open a brokerage account, how to buy and sell stock, and the different kinds of trade orders ... Read Answer >>
  4. Does a broker always have to buy a stock if I want to sell it?

    There are certain times when a broker must purchase the stock that you are selling. For example, if the broker is a market ... Read Answer >>
  5. Does the party loaning shares in a short sale transaction benefit in any way other ...

    To answer this question, we first need to clarify who is doing the lending in a short sale transaction. Many individual investors ... Read Answer >>
  6. What is the difference between a broker and a market maker?

    A broker is an intermediary who has a license to buy and sell securities on a client's behalf. Stockbrokers coordinate contracts ... Read Answer >>
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center