Front Running
Front running is the illegal practice of a broker executing trades for their own account ahead of a large client order, using advance knowledge that the client's trade will likely move the market price.
Exam Tip
Front running = trading ahead of CLIENT orders. Insider trading = trading on COMPANY info. Both are illegal but different!
What is Front Running?
Front running occurs when a broker or trader uses advance knowledge of pending client orders to trade for their own benefit before executing the client's order. This allows them to profit from the expected price movement caused by the client's large trade.
How Front Running Works
| Step | Action |
|---|---|
| 1 | Broker receives large client buy order |
| 2 | Broker buys same security for own account FIRST |
| 3 | Broker executes client's large order |
| 4 | Client's order pushes price up |
| 5 | Broker sells at higher price for profit |
Example
| Event | Price | Action |
|---|---|---|
| Client order received | $50.00 | Large buy order for 100,000 shares |
| Broker front-runs | $50.00 | Buys 1,000 shares for own account |
| Client order executed | $50.00 | Begins executing client order |
| Price moves up | $50.50 | Large order pushes price higher |
| Broker sells | $50.50 | Sells for $500 profit |
Why It's Illegal
| Violation | Explanation |
|---|---|
| Breach of Fiduciary Duty | Putting self-interest ahead of client |
| Market Manipulation | Using non-public order info |
| FINRA Rule 5270 | Prohibits trading ahead of customer orders |
| Securities Fraud | Material misuse of client information |
Types of Front Running
| Type | Description |
|---|---|
| Direct Front Running | Broker trades own account ahead of client |
| Indirect Front Running | Broker tips others to trade ahead |
| Index Front Running | Trading ahead of known index changes |
| Research Front Running | Trading before publishing research |
Detection Methods
| Method | How It Works |
|---|---|
| Time Stamps | Compare execution times of broker vs. client trades |
| Pattern Analysis | Identify suspicious trading patterns |
| Surveillance Systems | Automated monitoring of trade sequences |
| Trade Reconstruction | Review full audit trail |
Penalties
| Penalty | Consequence |
|---|---|
| FINRA Sanctions | Fines, suspensions, industry bars |
| SEC Enforcement | Civil penalties, disgorgement |
| Criminal Charges | Imprisonment for serious cases |
| Firm Liability | Supervisory failures |
Related Concepts
| Concept | Difference |
|---|---|
| Insider Trading | Using material non-public company info |
| Front Running | Using client order information |
| Churning | Excessive trading for commissions |
| Best Execution | Duty to get best price for client |
Exam Alert
Front running = trading AHEAD of client orders using advance knowledge. Violates FINRA Rule 5270 and fiduciary duty. Different from insider trading (which uses company information, not order information).
Study This Term In
Related Terms
Insider Trading
SecuritiesInsider trading is the illegal practice of buying or selling securities based on material, non-public information, or tipping others to trade on such information. It violates securities laws and can result in civil and criminal penalties.
Churning
SecuritiesChurning is the illegal practice of excessive trading in a customer's account by a broker primarily to generate commissions, without regard to the customer's investment objectives.
Best Execution
SecuritiesBest execution is the obligation of broker-dealers to execute customer orders at the most favorable terms reasonably available under the circumstances, considering price, speed, and likelihood of execution.
Fiduciary
GeneralA fiduciary is a person or organization legally obligated to act in the best interest of another party, putting the client's interests ahead of their own.