Front-Running in the Stock Market
The practice of front-running has come into focus.
What is Front-Running?
Front-running is an illegal activity involving the purchase of stocks based on unpublished information about large transactions that could influence stock prices. This allows those with insider information to gain profits by acting on the information before the market reacts.
How Does Front-Running Work?
- Institutional investors like foreign funds, mutual funds, and hedge funds initiate large trades.
- Insiders and brokers are privy to these trades' size and execution price.
- For example, a broker aware of a client's order to buy many shares may purchase shares before executing the order.
- Once the client's trade is executed, the insider sells the shares at a higher price for profit.
Why is Front-Running Illegal?
- Creates an unfair advantage and manipulates market prices.
- Undermines trust in financial markets.
- Violates fiduciary duty, where brokers or advisors must prioritize the client's interest.
Difference Between Front-Running and Insider Trading
- Front-running involves breaching fiduciary duty by profiting off client information.
- Insider trading involves using non-public insider information by executives or employees.
- Both are prohibited by Sebi, but insider trading does not require a fiduciary breach.
