What does the practice of front running involve?

The practice of front running primarily involves a broker or trader entering personal trades ahead of customer orders to secure better prices for themselves. This allows the individual to profit from the anticipated movement in the market caused by the larger customer orders. When a broker is aware of significant pending trades from customers, they may execute their own trades on the same security before those customer trades are completed. By doing so, they can benefit from the price movement that results from the execution of those customer trades.

Front running is considered unethical and is illegal because it violates the fiduciary duty that brokers owe to their clients to act in their best interests. It undermines the integrity of the securities market and can lead to a loss of trust from clients. Understanding this practice is crucial for compliance within the securities industry and awareness of the legal implications surrounding trading behavior.