Front-Running
Candlefocus EditorFront-running is seen in many aspects of trading, such as stock transactions. For example, if a trader has insider knowledge of a pending news announcement that will affect the price of a stock, they may buy shares of the stock before the news is made public. When the news out, everyone will want to buy the stock, driving up the price and making the trader a good profit.
Front-running is also common in commodity, derivatives, and foreign exchange markets. In these markets, traders may anticipate the large orders of buyers and sellers and take advantage of them in order to reap profits. They will buy or sell contracts that are related to the pending large orders and capitalize off the increased market activity.
In addition to being unethical, front-running is illegal in many areas. The U.S. Securities and Exchange Commission (SEC) takes strict measures against individuals and firms that engage in such practices. They impose fines and sanctions for violations of the law.
Naturally, there are some gray areas when it comes to front-running. It is possible for an investor to buy or sell a stock and then publicize the reasoning behind it if it is done in an open and transparent manner. For example, an investor may publicly disclose his plans to purchase a stock and explain why he believes it is undervalued. Although this does tip off other investors, both parties are getting the same information and thus have an equal opportunity to benefit from it.
In conclusion, front-running is an unethical and illegal practice in which a trader exploits insider information to gain an advantage over the unsuspecting public. Transparency and honesty are key in order to ensure that all parties have equal access to market-moving information and are not taking undue advantage of the situation. Those caught engaging in such activity are subject to fines and sanctions from regulatory bodies.