Wednesday, 19 August 2015

What is Front Running?

Front running is an illegal practice involving a broker who buys shares on his/her account just before executing a customer's order. 

Let's say I'm your broker and you ask me to buy 1 million shares of Apple. Apple is at $500 and I know that your 1 million purchase will move up the stock price. What I could do is sneak before I execute your order. I could buy 1000 shares for myself at $500 and then put your 1 million shares order in the market. 

As soon as I put your order, the price would go up. Now, your purchase has moved the stock price to say $520 and I have already gained $20 per share by doing no extra work. 

There are many variants of front-running. I could write a report on why you should buy Apple and just before publishing the report, I could buy some of the stock for myself. When my report gets published, the stock price could go up and I would profit. 

In short, front running is a way of illegally profiting by misusing the trust your customer placed upon you.

- Balaji Viswanathan

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