How does front running work?
May 09, 05:05

Mutual funds place large orders in stock markets through intermediaries, such as dealers. Front-running is an illegal method of profiting from being such an intermediary. The intermediary enters stock market minutes before a known big institutional investor enters the market, either to buy or sell shares. Right before he places an MF's buy order, he starts accumulating the stock. When the stock price rises after the MF's order, he will sell and make a quick profit. If the MF is to place a sell order, he will short-sell the stock right before it. The dealer will not place these trades in his own account, but through accounts of associates.

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