Front-running is unfair, undermines trust in markets
front-running has come under the spotlight once again after Sebi uncovered a front-running by stock market operator Ketan Parekh along with other entities. Ruchita Sonawane takes a closer look at what is front-running and how it happens.
What is Front-Running?
Front-running is an illegal practice of purchasing a stock based on unpublished information of a large transaction that could move prices. Since big trades by large investors usually move stock prices, those with insider information build positions prior to the execution of the large investor's order betting that they would make profits once the purchase or sale happens.
How does it work?
In most trades executed by institutional investors like foreign funds, mutual funds or hedge funds, insiders and brokers have an idea of the size of the deal and the price at which it will be executed. For example, an institutional client initiates an order to buy a significant number of shares of a company and informs the broker about the proposed trade. Someone at the broking firm aware of this information can then buy the shares of this company, before executing the client's order. Now, when the client's trade is executed, the company's shares gain and the person at the brokerage makes a profit by selling shares held by him/her at a higher price.
How did Ketan Parekh execute the front-running SCHEME?
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