Almost all of us must heard about some case of Front running, where companies have been found guilty of front running clients and been levied huge fines by regulators. Here you can find the most recent case of front running in India. This is another case which had attracted a lot of attention back in the days.
Now, let me explain about front running.
Some big broking houses which have institutional clients. Institutional clients, they transact in large quantity or in large volume. For example, if an institutional client wants to buy TCS in the market, then they would have buy probably a few more shares than a large individual buyer. If any institutional buyer buy a large quantities, the price of that share upwards due to the good behavior of that share in market.
Unlike retain participants, the institutional buyers do not place the order themselves. They prefer to call their broker and ask them to act on a specific price.
Now, imagine you work for a broker and also happen to be the dealer for an institutional client. They call and ask you to a huge number of share of some specific company. You know by the good behaviour of buying a huge number of that share, the price of that particular share is bound to go upward by few points. All we have to do is buy that particular share for our self and then place the order for the institutional client.
After we place the order for the client, we squared off our position at the higher price and pocket a neat profit.
This is called fron running of shares. unfortunately for the wrong doings of the employee, the company gets a bad name.
Whereas online retail brokers don't really have to deal with issues of front running as the clients themselves place the order.
Sources: Money Control, Times Of India & Zerodha.