Ridhi Finserv

Front running is a controversial and unethical practice in the stock market that can undermine the principles of fair trading. In this article, we will delve into what front running is, how it operates, and its implications for the Indian stock market, along with major incidents that highlight the gravity of this issue.

What is Front Running?

Front running occurs when a broker or trader exploits non-public information about a large pending order to gain an unfair advantage. This practice involves placing an order for their own account before executing the client’s order, capitalizing on the price movement that the large order is likely to cause.

How Front Running Works

1. Detection of a Large Order: A broker learns of a significant order from a client.
2. Personal Trade: The broker places a trade for their own account ahead of the client’s order.
3. Client Order Execution: The client’s large order is executed, typically causing a shift in the stock’s price.
4. Profit Realization: The broker sells their position at the new, more favorable price, pocketing the profit from the price movement they anticipated.

Implications of Front Running

• Unfair Advantage: Front running gives the trader an unfair advantage, compromising market integrity.
• Eroded Trust: It erodes trust in the financial system, as clients expect their brokers to act in their best interest.
• Market Distortion: It can distort market prices, leading to inefficient allocation of resources.

Major Incidents of Front Running in India

1. Quant Mutual Fund Case (2023): Recently, SEBI investigated and penalized individuals associated with Quant Mutual Fund for front running activities. This case involved fund managers using insider information about large trades to execute personal transactions, thereby profiting unlawfully at the expense of the fund’s clients.
2. HDFC AMC Case (2020): One of the most notable cases involved HDFC Asset Management Company (AMC). In 2020, two of its fund managers were accused of front running, leading to significant regulatory action and penalties. This case shook the Indian mutual fund industry and highlighted the need for stricter surveillance.
3. Religare Securities Case (2019): In 2019, SEBI barred two dealers of Religare Securities from accessing the securities market for front running. The investigation revealed that the dealers had executed trades ahead of large client orders, earning unlawful profits.
4. Kotak Mahindra AMC Case (2017): SEBI found fund managers of Kotak Mahindra AMC guilty of front running. The case involved fund managers trading in their personal accounts based on the information about upcoming orders of their own mutual funds.

Regulatory Measures

The Securities and Exchange Board of India (SEBI) has strict regulations against front running. SEBI has been proactive in investigating and penalizing offenders to maintain market integrity. Violations can result in severe penalties, including fines, suspension, or revocation of trading licenses. Despite these measures, detecting and proving front running can be challenging, requiring sophisticated surveillance and enforcement mechanisms.

Protecting Yourself as an Investor

• Choose Reputable Brokers: Work with established brokers who have a track record of ethical behavior.
• Stay Informed: Be aware of the regulatory environment and how it protects your interests.
• Report Suspicious Activity: If you suspect front running, report it to SEBI or other relevant authorities.

Front running is a silent threat to the principles of fair trading in Indian stock markets. Investors must remain vigilant, and regulators must continue to enforce stringent measures to ensure market integrity.