Front Running
Front running is the illegal practice in which a broker, trader, or other market participant uses advance knowledge of a pending client order — or other nonpublic information about imminent market activity — to trade in the same direction for personal or firm account before executing the client's order, profiting from the predictable price impact of the client's trade.
Front running is fundamentally a breach of fiduciary duty and a form of securities fraud. When a broker receives an order to buy a large block of shares for a client, the broker knows that executing the client order will likely move the price upward due to demand pressure. By purchasing shares for their own account before filling the client order, the broker profits from the client-created price movement — at the direct expense of the client who pays a higher price as a result.
The classic context for front running is the broker-dealer relationship, but the concept applies broadly to any situation where a person with advance knowledge of pending orders or market activities trades ahead of them. Portfolio manager front running involves a fund manager buying securities personally before purchasing them for client accounts. Research analyst front running involves trading in securities before publishing a research recommendation that will move the price when released publicly. Block trading desks at banks have faced allegations of sharing information about institutional client orders with proprietary trading desks.
Front running violates multiple legal provisions simultaneously. It violates the broker's fiduciary duty to the client. It constitutes fraud under Rule 10b-5 when it involves deceptive conduct in connection with securities transactions. It can constitute misappropriation of material nonpublic information (the client order is MNPI belonging to the client). When the information was obtained from a client who provided it in confidence, it satisfies the misappropriation theory of insider trading liability.
FINRA and the SEC actively investigate front running through surveillance of trading patterns around large order executions. Specific red flags include options activity or equity purchases in small accounts belonging to broker personnel immediately before large institutional orders, unusual spikes in trading volume at firms shortly before significant price moves, and patterns of profitable trades that are statistically inconsistent with random market participation.
Different from legitimate activities: a market maker's practice of adjusting quotes in anticipation of imbalanced order flow based on public information — without knowledge of a specific client order — is not front running. Similarly, statistical arbitrage and momentum strategies that predict price moves from publicly available signals do not constitute front running.