Front Running
Front running is a manipulative trading practice where a market participant uses advance knowledge of pending orders to execute trades that benefit from the price impact of those orders. This practice is generally illegal in regulated markets as it exploits confidential information for personal gain at the expense of other market participants.
Understanding front running
Front running occurs when a trader, often a broker or market maker, learns about an upcoming large order and trades ahead of it to profit from the anticipated price movement. For example, if a broker receives a large buy order for a stock, they might first purchase shares for their own account before executing the client's order, allowing them to profit from the price increase caused by the large order.
Types of front running
Broker front running
This occurs when brokers use their knowledge of client orders to trade for their own benefit before executing client trades. This is explicitly prohibited by most regulatory frameworks.
Electronic front running
In modern markets, this often involves using low latency trading networks to detect and act on order flow information before other market participants.
Index front running
This involves trading ahead of known index rebalancing events, where large institutional investors must buy or sell specific stocks to match index changes.
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Market impact and detection
Front running can be detected through various market surveillance systems that look for patterns such as:
The practice has several negative effects on markets:
- Increased transaction costs for institutional investors
- Reduced market efficiency
- Damaged market integrity
- Erosion of trust between brokers and clients
Next generation time-series database
QuestDB is an open-source time-series database optimized for market and heavy industry data. Built from scratch in Java and C++, it offers high-throughput ingestion and fast SQL queries with time-series extensions.
Regulatory framework and prevention
Financial regulators worldwide have implemented strict rules against front running. Key preventive measures include:
- Information barriers ("Chinese walls") between trading desks
- Pre-trade risk checks to identify suspicious patterns
- Real-time trade surveillance systems
- Regular compliance audits and training
Modern markets use sophisticated market surveillance systems to detect and prevent front running through pattern recognition and behavioral analysis.
Best practices for market participants
To protect against front running, market participants should:
- Use sophisticated order execution strategies
- Implement algorithmic trading systems with anti-gaming logic
- Monitor execution quality metrics
- Work with reputable brokers who demonstrate strong ethical practices
- Employ smart order routing systems that minimize information leakage
Next generation time-series database
QuestDB is an open-source time-series database optimized for market and heavy industry data. Built from scratch in Java and C++, it offers high-throughput ingestion and fast SQL queries with time-series extensions.
Impact on market structure
Front running has influenced modern market structure development, leading to:
- Dark pools and alternative trading venues
- Advanced order types that protect against information leakage
- Improved transaction cost analysis
- Enhanced regulatory frameworks
- More sophisticated market impact models
These developments have made markets more resilient to manipulative practices while increasing operational complexity for all participants.