About Front Running in Trading:
- What is it? It is an illegal practice in the stock market where an entity trades based on advanced information from a broker or analyst before the information has been made available to its clients.
- It is illegal in India.
- The strategies commonly used to front-run trades are Buy-Buy-Sell (BBS) trading pattern and the Sell-Sell-Buy (SSB) trading pattern.
What is Buy-Buy-Sell (BBS) trading pattern?
- In this trade pattern, the alleged front-runner by using the non-public information regarding an impending buy order of the big client places his buy order before the big client's buy order.
- As and when the big client places a buy order, the price of the security rises and the alleged front-runner sells the securities bought earlier.
- In this way, at the raised price the alleged front-runner makes a profit.
What is the Sell-Sell-Buy (SSB) trading pattern?
- In this trading pattern, the alleged front-runner by using the non-public information regarding an impending sell order of the big client places his sell orders before the big client's sell order.
When the big client places a sell order the price of the security falls which allows the alleged front-runner to buy back the securities at a lower price to meet his obligations which he had created earlier by selling securities.
