02.05.2024
Front-running
For Prelims: About Front-running, What is the Buy-Buy-Sell (BBS) trading pattern?
What is the Sell-Sell-Buy (SSB) trading pattern? Difference Between Front Running and Insider Trading
|
Why in the news?
The Securities and Exchange Board of India (Sebi) recently approved changes in mutual fund regulations to prevent front-running in asset management companies (AMCs).
About Front-running:
- It is when a broker or an investor joins a trade because they have pre-existing non-public information concerning a significant transaction that may change the asset’s price, equity, or derivative to obtain economic benefits.
- It is also known as forward-trading or tailgating. It is illegal in India.
- Front-running can occur in various forms and contexts, including the stock market, commodities market, and other financial markets.
- The strategies commonly used to front-run trades are the Buy-Buy-Sell (BBS) trading pattern and the Sell-Sell-Buy (SSB) trading pattern.
What is the Buy-Buy-Sell (BBS) trading pattern?
- In this trade pattern, the alleged front-runner, by using the non-public information regarding an impending buy order of the big client, places his buy order before the big client's buy order.
- As and when the big client places a buy order, the price of the security rises, and the alleged front-runner sells the securities bought earlier.
- In this way, at the raised price, the alleged front-runner makes a profit.
What is the Sell-Sell-Buy (SSB) trading pattern?
- In this trading pattern, the alleged front-runner by using the non-public information regarding an impending sell order of the big client, places his sell orders before the big client's sell order.
- When the big client places a sell order the price of the security falls which allows the alleged front-runner to buy back the securities at a lower price to meet his obligations which he had created earlier by selling securities.
Difference Between Front Running and Insider Trading:
- Insider trading involves trading securities based on material, non-public information about a company. Insiders, such as company executives, employees, or individuals with access to confidential information, use this privileged information to make trades for personal gain.
- On the other hand, Front Running involves trading securities based on knowledge of pending orders or anticipated market movements. It typically occurs when a broker or trader exploits their position or advanced expertise to prioritize their trades over their clients or the general public.
Source: The Economic Times