What is Front Running?
Front Running is an activity of purchasing a share of a particular companies stock listed with the intention of making a short-term profit by using particular information about that stock or company. This is an activity carried out by the broker who is having some information about a transaction that is going to occur in the future and because of that the price of such stock is going to increase and the broker can take advantage of such price change and can earn the profit. This is an illegal or unethical activity, because if some buyer is going to place a big order and due to that reason the price is going to change in some time. This information is only available to the broker and not to the common public, so this practice is considered an illegal activity for trading shares. This type of method is mainly used by the company for the purpose of speculation and price change in its share and this method is also used to manipulate the common public to buy shares of such a company.
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How does it work?
Front Running activity works in a very simple way. Whenever the broker gets an order from his client to make a purchase of shares of a particular stock in huge number and because of this, the broker will know that the price of a particular stock is going to increase in the short term, so he will place the order to buy that share first and that he will place the order of the client. By doing so he will earn the profit in his account without informing the client and that’s the reason this activity is considered illegal. However, most of the brokers practice such activity for their own benefit.
Secondly, when the brokers get information that a particular company is going to buy the share of a particular stock and the stock price is going to fluctuate and this type of information is not made available to the public, the brokers will try to take advantage of such information.
Examples of Front Running:
- The most common example of this activity is, say if the broker gets the order to buy 500 shares of a particular company and because of this purchase the price of the stock will increase so he will place his order first to earn money and then he will place the client order.
- In the same way, if any client calls the broker to sell 700 shares of a particular company and if the broker has that share in his account than he will first sell the share from his account to make a profit because once this numbers of the share will be sold the price will be reduced so he will secure his profit with such information.
- Another way this activity works is that if the broker gets the information about any investment activity or any new development activity is going to carry out in the company and because of that the price of the stock is going to increase so the broker will try to purchase it before the common public knows about it.
- One more this activity is carried out that if the broker gets to know that next day a particular stock is going to gain a boom in the market and within few hours the price of that stock is going to increase that they will try to purchase that stock as soon as the market open with low price and gradually as the price increase he will sell the stock and secure this money.
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There are various speculations occurring in the stock market by companies to earn money from the public and because of that, this type of activity is carried out. As under Front Running activity, the brokers use the information from the client to earn the profit. There is also another activity called Insider Trading in which the company’s employees and workers use the companies inside information to take the advantage of the stock price in the short run. Thus, there are various rules and regulations made by the supreme authority to monitor such activities but this cannot be made in control because most of the individuals and various brokers practiced such activity which no one knows. So the only reason that can help to prevent such activity is to monitor the transaction very carefully and high ethical standers should be maintained and lastly if such activities are found to occur then strict punishment action should be taken to control such activity.
Author: Charmi Mehta
About the Author: Charmi Mehta is currently pursuing an MBA with a specialization in Finance from the Department of Business Administration, Bhavnagar. Charmi is very much interested to work with data and its analysis and she is also fascinated by the financial market.