Front Running
Trading ahead of a known large order to profit from the price movement that order will cause.
How it is identified
Test: a person with knowledge of an impending substantial order transacts in the same security before that order is executed
Unit
qualitative
In depth
Front running is prohibited because it converts a client's own order flow into a cost borne by that client — the price they eventually get is worse because someone traded ahead of them. It typically involves dealers, brokers or connected persons with visibility into institutional order flow, and SEBI has brought several cases involving fund dealers and their associates. The offence turns on acting on knowledge of the order rather than on any view about the security. It sits alongside insider trading as a misuse of information asymmetry, differing only in the type of information misused.
Worked example
A dealer knowing a fund will buy 12 lakh shares buys 20,000 first and sells into the fund's order. The fund's clients pay a marginally worse average price, and the difference is the dealer's gain.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Front Running” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.