Front Running
The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients have been given the information.
Investopedia Commentary
For example, analysts and brokers who buy up shares in a company just before the brokerage is about to recommended the stock as a strong buy are practicing front running.
Another example is a broker who buys himself 200 shares in a stock just before his or her brokerage plans to buy a large block of 400,000 shares.
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See also: Broker, Bucket Shop, Bucketing, Buy, Churning, Circular Trading, Guilt Edged Investment, Pump and Dump, Tailgating
front running
Case Study The switch to pricing stocks in decimals rather than fractions brought narrower bid-ask spreads at the same time it raised new concerns about front running by specialists and market makers. With penny intervals in decimal pricing, market makers found it less expensive to step ahead of a large order. Suppose an institutional investor has placed a limit order to buy 50,000 shares of XYZ stock at $35.50. Knowledge of the limit order allows the exchange specialist or Nasdaq market maker to step ahead of the institutional order and offer $35.51 with little risk of incurring a big loss. In the event the stock price doesn't rise, the market maker can sell the stock for $35.50 to the institution that placed the limit order. On the other hand, a rise in the stock price produces a nice profit for the front-running market maker that offered minimal price improvement. Front running was considerably more expensive with fractional pricing, which resulted in price intervals of 1/16 (6.25¢) to 1/8 (12.5¢). Thus, decimalization benefited investors who profited from reduced spreads at the same time it increased the possibility that limit orders would not be executed. |