What is front running?
In one line: Front running is trading ahead of a big order you know is coming, to benefit from the price move it will cause. For brokers trading ahead of clients, it's illegal.
The idea in plain words
Imagine a shop clerk who hears a big customer will buy every umbrella in town tomorrow. Tonight, the clerk buys them all, then sells them to the customer at a higher price. The clerk used the customer's own plan against them.
Front running works the same way. Someone learns a large order is coming, trades first, and benefits when the big order moves the price.
Is it legal?
When a broker or firm trades ahead of its own customers' orders using that private knowledge, no. It breaks the broker's duty to the client. In the US, FINRA rules ban trading ahead of customer orders and front running block trades. The SEC treats misuse of customer order information as fraud. The CFTC polices the same kind of conduct in futures.
It's different from guessing. Seeing a stock rise and buying, or trading on public news, isn't front running. The key is using non-public knowledge of someone else's order.
A simple example
A fund tells its broker to buy 2 million shares of a stock. The trader handling it buys 50,000 shares for a personal account first. The fund's big order then pushes the price up 1%, and the trader sells. The trader gained at the fund's expense. That's illegal front running.
Crypto's version
On public blockchains, pending transactions are visible before they're confirmed. Bots watch for big swaps, buy just ahead and sell just after. This is called a sandwich attack. The victim gets a worse price, up to their Slippage tolerance limit.
How the law treats this on blockchains is far less settled than in stocks and futures. Either way, it costs the person being front-run.
A common mistake
Setting a high slippage tolerance on a big swap. That widens the window a bot can take from you. Keep tolerance tight, split big swaps, and expect a failed swap now and then.
If you suspect a broker of trading ahead of your orders, you can report it to FINRA or at sec.gov/tcr.
Questions
Is front running illegal?
For brokers and firms trading ahead of their customers' orders, yes. In crypto, bot "front running" on blockchains is a legal grey area, though it still hurts the trader.
Is front running the same as insider trading?
No. Insider trading uses secret company information. Front running uses advance knowledge of someone's pending order.
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