03rd January 2025 (12 Topics)
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Front-Running
Context
The Securities & Exchange Board of India (SEBI) has unearthed a front-running scam in the Indian securities market and in an interim order, debarred 22 entities.
What is Front-Running?
- Front-running is an illegal practice in financial markets where an individual or entity trades a security based on advanced knowledge of a forthcoming large trade that is likely to affect the price of the security.
- The person who engages in front-running uses this privileged information, typically obtained through their position in a financial institution, to make a profit before the original trade is executed.
- The concept of front-running is primarily seen in situations involving large institutional trades, such as mutual funds, pension funds, or hedge funds, where the size of the trade can significantly influence the market price of a stock, especially if the stock is less liquid.
- Front-running is illegal because it is based on insider information—information that is not available to the general public. This unfair advantage allows the person who knows about the trade to exploit it for personal gain before the market reacts to the institutional trade.
- The Securities and Exchange Board of India (Sebi) uses various algorithms, data analytics, and supervision technology to track instances of front-running and insider trading.
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