Front running, also known as tailgating, is the practice of entering into an equity (stock) trade, option, futures contract, derivative, or security-based swap to capitalize on advance, nonpublic knowledge of a large ("block") pending transaction that will influence the price of the underlying security.
[3] Cases typically involve individual brokers or brokerage firms trading stock in and out of undisclosed, unmonitored accounts of relatives or confederates.
[4] Institutional and individual investors may also commit a front running violation when they are privy to inside information.
Front running is prohibited since the front-runner profits come from nonpublic information, at the expense of its own customers, the block trade, or the public market.
A resulting US Securities and Exchange Commission investigation into allegations of front-running activity implicated Edward D. Jones & Co., Inc., Goldman Sachs, Morgan Stanley, Strong Mutual Funds, Putnam Investments, Invesco, and Prudential Securities.
Wall Street traders may have manipulated a key derivatives market by front running Fannie Mae and Freddie Mac.
Likewise, a broker could tail behind the person carrying a large client order to be the first to execute immediately after.
In practice, computer trading splits up large orders into many smaller ones, making front-running more difficult to detect.
[clarification needed] In the United States, they might also be breaking laws on market manipulation or insider trading.
The third-party trader might find out about the trade directly from the broker or an employee of the brokerage firm in return for splitting the profits, in which case the front-running would be illegal.