Front Running

A broker, dealer or analyst who knows a big buy order is coming buys first for their own account, then sells into the client’s order at the higher price. The reverse works for big sells. The profit comes from information the person holds because of their job, and the client pays through a worse price. It breaches the duty owed to the client and, in many countries, counts as market abuse or insider dealing. Variants include trading ahead of a published research note and, in crypto, bots that jump ahead of pending transactions. Firms control it through personal account dealing rules, restricted lists, order-handling records and surveillance that compares staff trades with client orders. Clients pay through worse execution prices, and the firm pays through lost trust and regulatory action.

An equity dealer receives a client order to buy 500,000 shares of a mid-sized company, about three times its usual daily volume. Minutes earlier, the dealer bought 20,000 shares through a relative’s account. The client order lifts the price and the dealer sells at a gain. Surveillance matches the relative’s account to the dealer, and the firm dismisses him and reports to the regulator.