Front-running is the illegal and unethical practice in which a broker, trader, or market participant trades in a security for their own account (or a related account) based on advance knowledge of a pending customer order that is expected to move the price.
How it works: 1. A broker receives a large customer buy order (e.g., purchase 100,000 shares of XYZ). 2. Before executing the customer's order, the broker buys XYZ shares for their own account. 3. The large customer order is executed, driving the price up. 4. The broker sells their personal shares at the higher price, profiting at the customer's expense (the customer got a worse price).
Legal violations: - Breach of fiduciary duty to the customer. - FINRA Rule 5270: Prohibits broker-dealers from trading for their own account ahead of a customer order. - SEC Rule 10b-5: Constitutes fraud and manipulation. - Violation of FINRA's front-running prohibition.
Related violations: - Scalping: A broker recommends a security they own, sells into the resulting price increase. - Interpositioning: Placing an unnecessary intermediary in a transaction to profit from both sides. - Late trading: Mutual fund orders executed after the 4 PM cutoff at the same day's NAV (illegal).
Who is subject to front-running rules? All registered persons, including research analysts who must not front-run reports they're about to release.
> Exam tip: Front-running = using advance knowledge of a pending client order to trade for personal benefit. It is a per se violation — there is no "good faith" defense. Know the distinction from insider trading: front-running involves customer order flow; insider trading involves corporate MNPI.