Simple definition
Front-running generally refers to a situation where someone uses non-public information about a client order or large trade that may move the market, and buys or sells before that order is executed in order to profit from the expected price movement.
In many regulated markets, trading ahead of a client order or using other material non-public information may breach rules or laws. However, not every trade placed “early” is front-running. If a trader acts based on public information, public quotes, or independent research, it is usually not front-running in the typical sense.
How front-running works
Front-running is mainly about information advantage and execution order. A common sequence looks like this:
- A market participant learns about a large buy or sell order that has not yet been made public.
- The order is large enough to potentially affect the market price, especially in a less liquid market or where the order size is significant.
- The person with that information trades first for their own account or a related account.
- After the large order enters the market and moves the price, the person may close the position for a profit.
For example, if an employee at a brokerage firm knows in advance that a client is about to buy a large amount of a particular stock, and the employee buys that stock in a personal account before the client order is executed, that conduct may be considered front-running.
Common scenarios
| Scenario | Potential issue |
|---|---|
A broker or trader learns of a client’s large order and trades first for their own account | Uses non-public client order information and may harm the client’s interests |
A fund manager trades in a personal account before a large fund transaction | May create conflicts of interest and fiduciary duty concerns |
A market maker or trading firm misuses order flow information | May undermine fair trading and market trust |
In crypto assets or low-liquidity markets, someone learns early about a listing, liquidation, or large order | Regulatory frameworks vary by jurisdiction, but the risk of information misuse remains |
Simple example
Suppose a client instructs a broker to buy 1 million shares of Company A. The person handling the order knows that the buy order may push the short-term price higher. Before the client’s order reaches the market, that person buys 10,000 shares of Company A in a personal account. After the client order is executed and the price rises, the person sells the personal position for a profit.
The key issue in this example is not that the person “predicted correctly.” The issue is that they used the client’s non-public order information and placed their own interests ahead of the client’s interests.
The boundary between front-running and legitimate trading
Front-running can be confused with normal market activity. Beginner traders can use the following guide as a starting point:
| Activity | Usually front-running? | Explanation |
|---|---|---|
Trading based on public earnings reports, news, or volume changes | Usually no | The information is public and, in principle, available to all market participants |
Buying or selling based on technical analysis | Usually no | This is an individual judgment and does not involve non-public client order information |
Trading for oneself after learning that a client is about to place a large order | Possibly yes | Involves non-public order information and a conflict of interest |
Hedging or market making by an institution under applicable rules | Not necessarily | Depends on the information source, trading purpose, client disclosures, and applicable rules |
In practice, whether conduct is considered front-running often depends on the jurisdiction, market type, nature of the information, relationship between accounts, internal records, and applicable regulatory rules.
What beginner traders should keep in mind
- Do not assume that every case where someone trades before you is front-running. Markets differ in speed, information processing, and liquidity.
- If you trade through a broker, review its order execution policy, conflicts of interest disclosures, and regulatory status.
- Be cautious with very low-liquidity instruments, where large orders can have a greater price impact and slippage may be more noticeable.
- Do not trade based on unverified “inside information.” Such information may be inaccurate and may also create compliance or legal risks.
- If you suspect your order has been improperly used, keep order records, execution timestamps, quote screenshots, and communications, and consider contacting the platform’s compliance department or the relevant regulator.
Related terms
- Insider trading: Buying or selling securities or other financial instruments using material non-public information. Front-running may sometimes overlap with insider trading, but the two are not identical.
- Order flow: Information about buy and sell orders submitted by market participants. Order flow may have commercial value, but how it is used is subject to rules.
- Best execution: The obligation of a broker, under applicable rules, to seek a reasonable execution outcome for client orders.
- Conflict of interest: A situation where the interests of a financial institution or professional may not align with the interests of a client.
- Slippage: The difference between the expected order price and the actual execution price, often seen in volatile or less liquid markets.
