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

Front Running

What it is:

Front running, also called forward trading, occurs when stockbrokers know their firm plans to purchase numerous shares of a particular stock, so they purchase shares of the same stock for themselves. Front running is considered unethical and, many times, is illegal.

How it works (Example):

Stockbrokers and traders often have access to inside information regarding the investment plans of their firm. Brokers and traders might be lured to use this insider information to make 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 price jump.

Why it Matters:

Front running is tempting for those with access to inside information. In most cases, the practice is highly unethical and may be illegal due to the obvious information advantage of industry insiders compared to equally capable investors outside the firm. Front running is an difficulty for regulatory bodies such as the Securities Exchange Commission (SEC), which bears the responsibility of preventing it.