Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Forward Trading

What it is:

Forward trading, also called front running, occurs when stockbrokers personally purchase shares of a particular stock while knowing that their firm plans to purchase numerous shares of the same stock. Forward trading is considered unethical and is often illegal.

How it works (Example):

Stockbrokers and traders often have access to inside information regarding the investments their firm is planning to make. Brokers and traders may be tempted to use this insider information to their advantage by making investments that benefit them personally.

To illustrate, suppose a stockbroker at an investment bank has learned that his bank's executive board will purchase 100,000 shares of Company XYZ stock in the coming week. Knowing that this large purchase will push up the price of the stock, the stockbroker purchases 100 shares of Company XYZ for his personal account, hoping to profit from the jump in price.

Why it Matters:

Forward trading is tempting for those with access to inside information. In most cases, the practice is highly unethical and may be illegal due to the clear information advantage to industry insiders compared to similarly capable investors outside the firm. Forward trading presents a challenge to regulatory bodies such as the Securities Exchange Commission (SEC), which bears the responsibility of preventing it.