Front running

Definition

entering into a transaction in advance of a pending or incoming client order that will or may impact the price of the relevant security

Context

When large client orders are received, dealers may trade ahead of the execution of client orders on their own account with an intention to benefit from an anticipated market impact created by the large client order execution.

Front running can also happen with respect to firm own orders, for example, when dealers receive large orders from other desks, divisions on businesses.

Front running can also involve more complex schemes where information about incoming large orders is passed to others either within the firm or outside the firm enabling individuals who are not directly involve in client orders execution front run these orders. This practice is related to sharing-confidential-information

Surveillance

Effective implementation of surveillance alerts for front running requires capturing the following trade data:

  • trade and position

  • client orders and their execution details

  • market prices and volumes

  • communications data

Effective surveillance require accurate timestamps and analysis of client orders and house positions. Surveillance alerts should also aim to detect instances of inappropriate information sharing about incoming large orders.

Risk taxonomy

Parent risks

Regulatory source

FCA FX market wide remediation programme