What is Front Running in the Stock Market?

What is Front Running in the Stock Market?

Front running is a practice in which a trader or an investor usesadvance knowledgeof a large transaction to profit from the transaction. This practice is considered unethical and illegal in the stock market. In this article, we will discuss what front running is, its impact on the stock market, and how to avoid it.

What is Front Running?

Front running is anillegal practicein which a trader or an investor uses advance knowledge of a large transaction to profit from the transaction. The trader or investor may buy or sell securities in advance of the large transaction, which causes the price of the securities to move in their favor. This practice is unethical because it gives the trader or investor an unfair advantage over other market participants.

Impact of Front Running on the Stock Market

Front running can have a significant impact on the stock market. It distorts the market by creating anartificial demandor supply for a security, which can cause the price of the security to move in an unpredictable direction. This can result in losses for other market participants who are not privy to the advance knowledge of the large transaction.

How to Avoid Front Running

To avoid front running, market participants can take the following steps:

1. Keep large transactions confidential: It is important to keep large transactions confidential to avoid tipping off other market participants.

2. Use multiple brokers: Using multiple brokers can help avoid front running because it makes it more difficult for a single broker to obtain advance knowledge of a large transaction.

3. Use limit orders: Using limit orders can help avoid front running because it sets a fixed price at which the transaction will be executed, which makes it more difficult for a trader or investor to manipulate the price of the security.

Investment Strategies to Avoid Front Running

Investors can use the following investment strategies to avoid front running:

1. Long-term investing: Long-term investing involves holding onto securities for an extended period of time, which reduces the risk of front running.

2. Diversification: Diversification involves investing in a variety of securities, which reduces the risk of front running because it makes it more difficult to target a specific security.

3. Index investing: Index investing involves investing in an index fund, which tracks a specific market index. This strategy reduces the risk of front running because it involves investing in a large number of securities, which makes it difficult for a trader or investor to manipulate the price of the securities.

Conclusion

Front running is an unethical and illegal practice in the stock market. It distorts the market and gives an unfair advantage to traders or investors with advance knowledge of a large transaction. To avoid front running, market participants should keep large transactions confidential, use multiple brokers, and use limit orders. Investors can also use long-term investing, diversification, and index investing to avoid front running.