Front running
Using non-public knowledge of a substantial impending order to trade ahead of it in the same or related securities or derivatives, expecting the price to move once the order becomes public.
In plain language
A dealer learns that a client is about to place a very large buy order. He knows that order will push the price up. So before placing it, he quietly buys the same share for himself - and sells once the client's order has lifted the price.
That is front running. The dealer's profit comes directly out of the client's pocket: the client pays a higher price partly because of the dealer's own buying. The information he used was not his; it was entrusted to him to execute the client's order.
Indian regulation treats front running as a fraudulent and unfair trade practice, not as sharp but legal behaviour. It applies whether the trade ahead is in the same share, a related security, or futures and options on it.
How it works
The workbook's definition (Chapter 2, section on the PFUTP Regulations):
The workbook adds that it can be described as an illegal act by a dealer or stock broker who places his own or his firm's order ahead of a client's order, or while the client's order is pending, taking unfair advantage where the client's order is likely to affect the price. It may be buying or selling ahead of a client's purchase or sale.
Provisions violated, as the workbook states them: Section 12A (a), (b) and (e) of the SEBI Act, 1992, and Regulations 3 (a) to (d) and Regulation 4(q) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
Consequences.
- Where SEBI has reasonable grounds to believe dealings are detrimental to investors or the market, it may order an investigation into the intermediary or associated persons.
- On the investigating officer's report, SEBI may start action for suspension or cancellation of registration.
- Anyone indulging in fraudulent and unfair trade practices is liable to penalty under the SEBI Act.
- SEBI may also start parallel civil enforcement proceedings on the same facts.
A worked example
Illustrative figures.
At 10:15 a.m. a dealer at a broking firm receives an order from an institutional client to buy 5,00,000 shares of a mid-cap company trading at Rs 250. He delays entering it by a few minutes.
- In that window he buys 20,000 shares at Rs 250 in a relative's account he controls: 20,000 x Rs 250 = Rs 50,00,000.
- He then releases the client's order. The large buying pushes the price to Rs 256.
- He sells his 20,000 shares at Rs 256: 20,000 x Rs 256 = Rs 51,20,000.
His profit: Rs 51,20,000 - Rs 50,00,000 = Rs 1,20,000.
Every element of the definition is present: non-public information (the client's order), a substantial impending transaction, a trade in advance of it in the same security, done indirectly through another account, in anticipation of the price change. It would be no defence that he used a relative's account, or that he bought futures on the stock instead of the shares - the definition covers "directly or indirectly" and "related securities or futures or options contracts".
Why NISM asks about it
Chapter 2 (Market Participants in the Securities Market) describes front running "as an example of unfair trade practices", immediately after the list of manipulative, fraudulent and unfair trade practices under the PFUTP Regulations, 2003, and alongside the Box on dabba trading. The chapter's sample question on PFUTP ("entering into a transaction in securities without intention to perform it...") tests the same family. Chapter 8's code of conduct for stock brokers - not putting the broker's interests above the client's - is the ethical side of the same rule.
Common exam traps
- Front running is not insider trading. The workbook describes insider trading as dealing in a company's securities on confidential, unpublished information relating to the company, under the SEBI (Prohibition of Insider Trading) Regulations, 2015. Front running uses knowledge of a pending order or transaction, and falls under the PFUTP Regulations.
- It covers derivatives and related securities, not only the same share.
- "Directly or indirectly" - trading through a relative's or associate's account is still front running.
- Buying ahead of a client's buy and selling ahead of a client's sale both count.
- Provisions: Section 12A (a), (b), (e) of the SEBI Act and PFUTP Regulations 3 (a)-(d) and 4. The workbook cites Regulation 4(q); in its own list of practices, the item describing an order placed while in possession of non-public information about a substantial impending transaction is (n), and (q) is illegal mobilisation of funds through collective investment schemes. Quote the provision as the workbook does, but know the substance.
- SEBI can both penalise and pursue parallel civil enforcement on the same facts.
Where this is taught
- Series III-A · Chapter 8: SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003introduced here
- Series XV · Chapter 14: Legal and Regulatory Environmentintroduced here
- Series V-B · Chapter 10: Legal and Regulatory Environmentintroduced here
- Series VII · Chapter 2: Market Participants in the Securities Marketintroduced here
Related terms
- Mis-sellingSelling securities or securities services by knowingly making a false statement, hiding material facts or risk, or not taking reasonable care that the product suits the buyer — an unfair trade practice.
- Algorithmic tradingAny order generated by automated execution logic rather than typed in by a person — software that pushes buy and sell orders into the exchange once its parameters are met.
- Dabba tradingIllegal off-exchange "trading" by unregistered operators who record deals against exchange prices in private books and settle only price differences in cash, with no delivery, guarantee or investor protection.
- Unique Client CodeThe single code a broker assigns to a client once KYC is complete, mapped to that client's PAN and demat account, under which every one of the client's orders must be entered on the exchange.
- Obligations of trusteesThe duties SEBI places on a mutual fund's trustees: hold scheme property in trust, review every AMC-associate transaction quarterly, and certify to SEBI half-yearly that nothing improper happened.
- Economic Offences WingThe wing of the CBI, created in 1964 and expanded into a full Economic Offences Division in 1994 after the 1992 securities scam, that investigates serious financial frauds including share price manipulation.
- Tippee liabilityLiability of a person who trades on a tip about confidential information, such as an impending large order — requiring proof that the tipper owed confidentiality, the tippee knew of the breach, and traded anyway.
- Sham transactionsTrades entered into without intending to perform them or to change ownership of the security — deemed a manipulative, fraudulent or unfair trade practice under regulation 4(2) of the PFUTP Regulations.
- AMFI Code of EthicsAMFI's code of good practice for AMCs and trustees, drawn up to supplement the SEBI code of conduct in the Fourth Schedule and set more explicit standards, from integrity to enforcement.
- Self-dealingUsing your position inside a fund house to transact with the fund itself on terms that benefit you unfairly, at the expense of the scheme and its unit holders — banned outright by the AMFI Code of Ethics.
- PFUTP RegulationsSEBI's 2003 regulations banning fraudulent, unfair and manipulative trade practices in the securities market, including a specific list of dealings deemed fraudulent regardless of actual gain or loss.
- Research entityA registered intermediary — such as a stock broker or merchant banker — that issues research reports or opinions on securities to influence investment decisions, requiring SEBI registration under the RA Regulations.
- Fraud under PFUTP RegulationsAny act, statement or hidden fact used to induce someone to deal in securities, as SEBI's 2003 fraud regulations define it — whether or not actual gain or loss results.