Front running

Front running, also known as tailgating, is the practice of entering into an equity (stock) trade, option, futures contract, derivative, or security-based swap to capitalize on advance, nonpublic knowledge of a large ("block") pending transaction that will influence the price of the underlying security. In essence, it means the use of knowledge of an impending trade to engage in a personal or proprietary securities transaction in advance of that trade. Front running is considered a form of market manipulation in many markets. Cases typically involve individual brokers or brokerage firms trading stock in and out of undisclosed, unmonitored accounts of relatives or confederates. Institutional and individual investors may also commit a front running violation when they are privy to inside information. For example, unscrupulous employees with access to their firm’s order management system may engage in front running after observing consistent stock price movements in response to the firm’s largest trades.  To hide the scheme, the employees typically feed information about the victimized firm’s upcoming orders to a third-party who places earlier orders for the same securities with different brokers. A front running firm either buys for its own account before filling customer buy orders that drive up the price, or sells for its own account before filling customer sell orders that drive down the price. Front running is prohibited since the front-runner profits come from nonpublic information, at the expense of its own customers, the block trade, or the public market.

Maximizing a front-running scheme’s profits magnifies its harm. The larger the illicit orders, the larger their expected gains.  In an optimized scheme the front running orders may approach or even exceed the size of the victimized firm's orders pushing the price away from the firm's target price before it has placed its first order.

In 2003, several hedge fund and mutual fund companies became embroiled in an illegal late trading scandal made public by a complaint against Bank of America brought by New York Attorney General Eliot Spitzer. A resulting US Securities and Exchange Commission investigation into allegations of front-running activity implicated Edward D. Jones & Co., Inc., Goldman Sachs, Morgan Stanley, Strong Mutual Funds, Putnam Investments, Invesco, and Prudential Securities.

Following interviews in 2012 and 2013, the FBI said front running had resulted in profits of $50 million to $100 million for the bank. Wall Street traders may have manipulated a key derivatives market by front running Fannie Mae and Freddie Mac.

In 2021 and 2022, the SEC charged three separate front running schemes discovered by its own data analysis. The largest of the three schemes discovered using the Consolidated Audit Trail was alleged to have generated ill-gotten gains of nearly $50 million.

The terms originate from the era when stock market trades were executed via paper carried by hand between trading desks. The routine business of hand-carrying client orders between desks would normally proceed at a walking pace, but a broker could literally run in front of the walking traffic to reach the desk and execute his own personal account order immediately before a large client order. Likewise, a broker could tail behind the person carrying a large client order to be the first to execute immediately after. Such actions amount to a type of insider trading, since they involve non-public knowledge of upcoming trades, and the broker privately exploits this information by controlling the sequence of those trades to favor a personal position.