Front running in Trading

April 30, 2023

Recently, the Securities and Exchange Board of India barred five entities from the securities market and impounded illegal gains of Rs 2.44 crore made by them in a case pertaining to front-running.

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.