Front running is trading by a broker, on their own account, ahead of processing a client's order that is likely to move prices.
Front running is illegal, and a serious breach of a broker's duty to their clients. It is most common for large, usually institutional, orders in badly regulated and illiquid markets.
Front running is now harder than it was in the past as most trading takes place through automated trading systems that record the time at which trades are placed, making it difficult to conceal delay of a clients order so that trades can be placed ahead of it. The more extensive record keeping also makes it easier to find suspicious orders.
Front running is still quite possible as brokers may still have knowledge of clients planned buys and sells.
The term “front running” is also used to mean:
- Insider trading ahead of the release of information.
- Trading ahead of the release of analyst recommendations and research to clients: in this case those trading benefit at the expense of their clients.
- Trading based on inferring the intentions of a broker and their clients from public information. A systematic example of this is much high frequency trading. This is legal: it not based on misuse of confidential information, and does not breach a duty to a client.