What is front running? Front Running refers to a kind of market manipulation in many markets. In simple terms, placing own order - in order to derive illegitimate gains - before a large quantity of order is placed by an entity. Post execution of large quantity of the order, profit is booked immediately in the securities/stocks bought or sold as bulk purchase or sale order that results in upward or downward movement in securities/stock prices.
It is also an illegal as well as unethical practice in stock markets where an Individual, Corporate or Institution trades on the basis of non-public or advance intimation from a Broker or Analyst well before it is made available to general public or clients. It also tantamount to breach of confidentiality clause signed by these entities. An individual or Fund Managers of an AMC or KMP of a Corporate connive with dealer or trader of a stock broker for front running purposes. Generally, these entities engage in frequent communication during market hours and securities/stocks order placing in the compromised or routing trading accounts synchronising with the call timings.
Modus Operandi: Under the front running mechanism, an entity or number of entities compromise their trading accounts for use as per advice of a stock broker or an analyst in lieu of monetary gains or favours in kind in the form of commission, travel tickets, holidays, gifts, reduced brokerages, etc. from the profits generated out of the front running activity.
To illustrate, a stock broker receives an order for purchasing large quantity of shares say 10,00,000 of an ABC company. Under normal circumstances, such large quantity of buy order is going to drive up the share price of ABC company. Before placing such large orders, stock broker buys shares in the compromised or routing trading accounts opened for front running purposes. Post execution of client order, the broker immediately sells the ABC company shares and pocket the gains.
Recent Front Running Cases: SEBI is the market regulator for Stock markets, and Mutual Fund activities. Let's have a look at the recent history of front running cases where SEBI has barred the concerned entities from the stock market operations for a specific period besides ordering recovery of unlawful gains.
* In October 2020, SEBI has barred 6 individuals till further directions, in front running case involving a dealer of a leading brokerage house.
* In another case involving a Corporate group, SEBI has banned 16 entities from stock market for a period up to 7 years, in December 2020. Additionally, SEBI has asked recovery of almost Rs 20 crore from 6 out of 16 entities involved.
* In May 2021, SEBI had barred 3 individuals from stock markets for 6 months besides recovery of unlawful gains of Rs 8.87 lakh for running front trades of a leading fund house.
* In yet another case, in June 2021, involving a trader associated with a reputed global group, SEBI has fined an ex-trader, and 10 others for carrying out front running trades. Further, SEBI has asked these entities to disgorge a sum of Rs 2.1 crore made as illegal profits.
* In July 2021, SEBI has banned 11 entities, including individuals, from the stock markets for front running trades linked to the dealers of a Securities firm of a well known group.
* Recent case allegedly involving fund managers of a large fund house has come to light, wherein funds managers, reportedly, have been suspended or sent on long leave for running front trades for certain MF schemes.
Under insider trading, individuals or family members' trading or demat accounts are used for buying or selling shares of a company by the designated officials of the Corporate, who are in possession of the private, confidential or non-public information.
Please keep watching this space for more updates on Stock Markets and Mutual Funds!
Comments