What is Front Running in Stock Market

Front Running:

Front running is a term referred in Stock Market ecosystem. It refers to the practice where a broker or a trader tries to benefit personally from an advance or non-public knowledge of a large pending transaction which is expected to significantly influence the price of a stock.

Here’s is an example of this practice:

For. e.g. A Mutual Fund house is about to place a large order for buying a security. An internal analyst or a trader who is having an advance knowledge of this transaction tries to benefit from this transaction.

He purchases some stocks of that script on his personal Demat account and then the mutual fund house places the order. The large purchase order from the Mutual fund is likely to drive the stock price upward, thus helping the analyst or trader gain personal profit.

Another example of this can be a scenario where a broker is sent an order to place a large order to buy a stock say ABC company, especially by an HNI or large institutions. The Broker may try to make use of this information by first purchasing some stocks of ABC Company on personal account and then will subsequently execute the large order thus pocketing some profit out of this advance and non-public knowledge of the transaction.

This is an illegal and unethical practice as the broker or trader acted on an information which was not in public domain yet.