Front-Running

What is front-running?

Front-running occurs when a broker, trader, or firm trades a security for their own account based on advance knowledge of a pending client order, recommendation, or other nonpublic information that is likely to move the price. Acting on such information to profit in advance is generally unethical and, in many cases, illegal. Front-running is sometimes called tailgating.

Key takeaways

• Front-running is profiting from nonpublic, market-moving information about an imminent trade or recommendation.
• It is usually illegal and breaches fiduciary and ethical duties.
• Some similar practices (index front-running, disclosed research positions) can be legal depending on transparency and whether the information is public.

How front-running works (simple example)

A broker receives a large client order to buy 500,000 shares of a stock. Knowing this purchase will likely push the price up, the broker first buys shares for their personal account, then executes the client’s order. After the client order drives the price higher, the broker sells their position for a profit. That profit was gained by exploiting nonpublic client information and may also harm the client through worse execution or price impact.

Other forms of front-running

• Exploiting analyst recommendations: If a broker trades ahead of a firm’s unpublished buy/sell research that will be distributed to clients, that can be front-running. There is nuance when a trader discloses a personal position while publishing genuine, fact-based analysis (versus deceptive hype).
• Index-related front-running: Traders may anticipate index fund reconstitutions and trade the affected stocks ahead of funds adjusting holdings. Because index schedules and rules are public, this behavior is common and typically legal.
• Using derivatives: Front-running can involve buying options, futures, or other instruments tied to the underlying security before the known event.

Regulatory and legal context

• Front-running is often illegal. Rules and regulations prohibit brokers and portfolio managers from taking personal advantage of pending client trades or privileged firm information.
• Front-running is related to—but distinct from—insider trading. Insider trading usually involves corporate insiders trading on confidential corporate information (earnings, M&A). Front-running generally involves market intermediaries trading ahead of client orders or firm recommendations.
• Payment for order flow (PFOF) is not front-running. PFOF is compensation a broker receives for routing orders to a particular market maker; the market maker executes the order rather than trading ahead of it.
• Trading ahead (using a firm account to step in front of client orders rather than matching existing market interest) is illegal but treated separately from classic front-running.

Real-world example

Regulators have fined and required restitution from firms that traded against or ahead of client orders. In one notable enforcement action, a market maker was found to have manually rerouted large client orders and traded for its own account on the same side of the market, disadvantaging customers; the firm agreed to make clients whole and paid a fine.

Market impact

Front-running can move prices (up or down) and distort fair execution, harming clients and undermining market integrity. Even when profits are small in isolation, systematic abuse can cause material harm to investors and reduce trust in intermediaries.

Bottom line

Front-running means trading for personal gain based on nonpublic, market-moving knowledge of upcoming client orders or firm actions. It is unethical and usually illegal. Distinctions matter—publicly available information, transparent disclosure of positions, and widely known index rebalancing rules can make similar-looking activity lawful. Regulators pursue violations to protect investors and preserve fair markets.