Front running: meaning, examples and SEBI rules

Imagine someone learns that a large fund is about to buy a share, buys it first and then sells it to the fund at a higher price. That is front running. This page explains what it is, why it is illegal and what SEBI has done to stop it.

Quick answer

Front running is the illegal practice of trading in a security ahead of a large pending order, using advance knowledge of that order. The person, often a broker, dealer or fund employee, knows the big order will move the price. They trade first, then profit when the large order pushes the price in their favour. It harms clients and breaks market fairness.

Key takeaways

• It means trading ahead of a known large order.
• It uses confidential information about pending trades.
• Brokers, dealers and fund staff are common offenders.
• SEBI's PFUTP Regulations prohibit it.
• Mutual funds must have systems to deter it since 2024.

What is front running?

Large orders, such as a mutual fund buying lakhs of shares, can move a share price. Anyone who knows about such an order before it is placed has an unfair edge. Using that knowledge to trade first for personal gain is the offence.

The person may buy before a large buy order and sell after the price rises, or sell before a large sell order and buy back after the price falls. Often, they use accounts in the names of relatives or friends to hide the activity.

A simple example

A dealer at a fund house learns the fund will buy 10 lakh shares of a company tomorrow. Tonight, the dealer tells a friend, who buys 20,000 shares at Rs 200 the next morning. When the fund's large order comes in, the price rises to Rs 206.

The friend sells at Rs 206 and makes a profit of Rs 1.2 lakh before costs, partly at the expense of the fund's investors, who paid a higher price. This is front running, and it is illegal.

How does SEBI treat front running?

SEBI's PFUTP Regulations, 2003, prohibit this practice as a fraudulent and unfair trade practice. SEBI has passed many orders in such cases, banning people from markets and ordering them to give up unlawful gains.

In 2024, SEBI amended its mutual fund rules to require asset management companies to set up an institutional mechanism to deter and detect front running and similar misconduct. This includes better surveillance, internal controls and a whistle-blower system.

How is it different from insider trading?

Insider trading uses unpublished price sensitive information about a company, such as results or a merger. Front running uses information about pending trading orders. Both misuse confidential information and both are prohibited.

Firms are also expected to separate their own trading from client trading and record dealer calls and messages. These steps help find and prevent misuse of order information.

Why it matters for investors

This practice raises costs for fund investors and reduces trust in markets. Strong rules and surveillance help protect your interests when you invest through mutual funds or brokers.

In short, front running is trading ahead of others using secret order information. It is a serious offence, and SEBI continues to strengthen systems to stop it.

Frequently Asked Questions