Front-Running
Front-running is trading stock or any other financial asset by a broker who has inside knowledge of a future transaction that is about to affect its price substantially. A broker may also front-run based on insider knowledge that their firm is about to issue a buy or sell recommendation to clients that will almost certainly affect the price of an asset.This exploitation of information that is not yet public is illegal and unethical in almost all cases. Front-running is also called tailgating.
Front Running
Definition
Front running refers to the practice where brokers trade stocks or other financial assets based on insider information that is about to significantly affect their prices. Brokers may also engage in front running based on insider information because their firm is about to issue buy or sell recommendations to clients, which will almost certainly impact the asset's price. This behavior, which involves using non-public information, is illegal and unethical in almost all cases. Front running is also known as tailgating.
Origin
The concept of front running emerged with the development of financial markets. As early as the early 20th century, with the rise of stock markets, issues of insider trading and front running began to surface. In the 1930s, the United States began regulating insider trading through the Securities Exchange Act, and front running was also addressed within this regulatory framework.
Categories and Characteristics
Front running can be categorized into two main types: one based on insider information about a company's upcoming financial reports or major events, and the other based on a brokerage firm's upcoming buy or sell recommendations to clients. The former typically involves company executives or internal employees, while the latter involves brokers or analysts. The key characteristic of front running is the use of non-public information for trading, which is highly covert and illegal.
Specific Cases
Case 1: A company executive sells a large amount of company stock before the company releases its quarterly earnings report, knowing that the report will show poor performance. After the report is released, the stock price plummets, and the executive avoids significant losses.
Case 2: An analyst at a brokerage firm buys a stock before the firm issues a strong buy recommendation for that stock. After the recommendation is released, the stock price rises, and the analyst makes a substantial profit.
Common Questions
1. What is the difference between front running and insider trading?
Front running is a form of insider trading that specifically involves trading based on upcoming company recommendations or reports.
2. How can front running be identified?
Identifying front running typically involves looking for unusual trading behavior and timing. Regulatory bodies monitor trading records and information flows to investigate such activities.
