Front-running occurs when a broker or other entity trades stocks based on advance knowledge of pending orders from clients, thereby capitalising on the expected movement in stock prices.
For example, if a mutual fund plans to purchase a large number of shares of a particular company, the broker might buy shares beforehand, anticipating that the price will rise once the fund's order is executed.
This unethical practice allows the broker to profit at the expense of the client and the market's fairness.
Front-running versus insider trading
While front-running and insider trading both involve trading based on non-public information, they differ in key ways.
Insider trading typically involves company executives or employees using confidential company information to gain an advantage in the stock market.
In contrast, front-running generally involves brokers or fund managers exploiting knowledge of their clients' pending trades.
Both practices undermine market integrity and erode investor trust but differ in the source and nature of the privileged information.
Historical context and SEBI's actions
Aditya Birla Mutual Fund: In April 2024, SEBI settled front-running allegations involving Aditya Birla Mutual Fund, with four entities paying a total of ₹3 crore and facing a six-month debarment.
Axis Mutual Fund: In March 2023, SEBI barred Viresh Joshi and 20 others from accessing the capital markets, impounding ₹30.5 crore in ill-gotten gains.
Deutsche Mutual Fund (DHFL Pramerica Mutual Fund): In December 2021, fund manager Akash Singhania, along with his parents, settled their case by paying ₹5 crore.
HDFC AMC: In September 2019, a 12-year-old front-running case was settled with two entities paying ₹10 crore.
In response to the growing number of front-running cases, SEBI floated a consultation paper in May 2022, followed by amendments to mutual fund regulations in April 2024.
These amendments aim to establish an institutional mechanism to curb front-running, prevent fraudulent transactions, and enhance regulations to tackle such malpractices effectively.
