Front-Running

Front-running, also known as forward trading or trading ahead, occurs when a broker or trader takes advantage of foreseeable market movements by trading on his or her personal account based on advanced knowledge of a pending order. In the traditional example, a broker learns of a large client order and trades on her own individual account before the client order is executed. The broker, anticipating that the large client order will move market prices, structures her trades to ensure she will profit from the shift.

Front-running occurs in a number of markets, including those for stocks, index funds, foreign exchange markets (forex), collateralized debt obligations, and other securities and commodities. And in high-frequency trading (HFTs), front runners notoriously employ high-speed computer programs to detect large competitor orders, and then trade ahead of them.

Although front-running is widely considered unethical, it is not on always illegal—but it can be if the front runner is using information that is not available to the public, and if he or she violates a duty of loyalty to the client. Depending on the type of equity traded and the type of transaction, illegal front-running can fall under the purview of the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), or both, and may give rise to a whistleblower reward. The SEC in particular has a strong history of bringing regulatory actions and lawsuits against individuals and firms engaged in illegal front-running.

To find out more about whether a particular type of fraud is actionable under Dodd-Frank or covered by the CEA, contact us now.