Front Running
AdvancedFront running is the illegal or unethical practice of a broker or trader using advance knowledge of a client's large pending order to trade for their own benefit before the client's order is executed.
Large orders can move prices. If a broker knows a client is about to buy a large number of shares, the broker could buy first, then sell to the client or in the market at the higher price that the client's order causes.
For example, a broker receives an order to buy 1,000,000 shares for a pension fund. Before executing it, the broker buys shares for their own account. When the pension fund's order pushes the price up, the broker sells at a profit, while the client pays more.
Front running is a breach of the broker's duty to act in the client's interest and is prohibited in most markets. It is a form of market abuse.
The term is also used more loosely for strategies that try to anticipate predictable trades, such as buying shares expected to be added to an index before index funds buy them. These strategies may be legal if they do not rely on confidential client information, but they can increase costs for the investors whose trades are anticipated.
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