Brokers or traders taking advantage of advance knowledge of pending orders from their clients by executing their own trades beforehand, leading to adverse price movements for the client.
By front-running, the broker or trader can potentially profit from the anticipated price movement resulting from their client’s order.
The broker or trader must have access to non-public information about pending orders from their clients. This information can be obtained through various means, such as having direct access to client order flows or being involved in order routing and execution.
Armed with the knowledge of pending client orders, the front-runner executes their own trades in the market before the client’s orders are filled. The front-runner aims to take advantage of the price movement caused by the client’s order by buying or selling the relevant security.
That is why Regulatory authorities closely monitor brokerages to ensure compliance with rules and regulations, including those related to front-running. If any brokerage or its employees engage in front-running practices, it is typically considered a serious violation that can lead to legal consequences, regulatory penalties, and reputational damage.