Why Front Running Traders Hurt Fair and Open Markets

Front Running (a.k.a. Trading Ahead) is the unethical practice of a trading based on information about a pending order or trade that someone else needs to make or will soon make.  Using this private information a front runner places an order in advance of another client for personal unwarranted profit. Typically this also disadvantages the person placing the other order.

Recently Jon Ruggles was banned from trading on the CME Group exchanges and was fined $300,000.  

Front Runner Scorecard

Who Is Jon Ruggles?

• An airlines executive with Delta, the second largest US carrier.

What did he trade?

• Oil futures

What did he know?

• That his airline was going to place hedging orders for their jet fuel consumption.

What was the Front Runner’s result?

• He made $3 Million in illegal profits.

What happened to the account being front runned?

• Delta potentially paid $3 million more than they should.

What happened to the market?

• The market was priced based on insider information, not under fair market conditions.

For more information on this case see: http://www.reuters.com/article/us-cme-trader-delta-air-lines-idUSKCN0YZ2C3

Other example cases have occurred in other markets around the world.

• Six former UBS forex staff banned by Swiss watchdog for front running and insider trading in the currency markets.

• Securities fraud: BMA Capital fined for front-running in Pakistan for an investment in cash equities.

• Securities Fraud: German construction group Hochtief is liable for a fine of up to $1 million after admitting to insider trading ahead of a $1.15 billion hostile takeover of Leighton Holdings in 2014.

• Listed Derivative: On Nymex in 2015 Koch Supply & Trading, LP and its trader Arian Fouquet settled charges alleging that, on four dates in January 2014, Mr. Fouquet used CME Group’s Globex platform to pre-hedge block trades with a proposed counterparty, prior to concluding such transactions with the counterparty.
  
  
  

The rules that our regulators have in the markets have the goal of providing fair and equitable markets for all investors and participants.

If a broker, or other person places an order in advance of your order knowing that your order is likely to move the market, then you have been robbed. Additionally other market participants have been cheated out of a fair and equitable marketplace for price discovery.

Front Running or Trading Ahead of an order is clearly taking advantage of the client placing the order. This can happen in any market where inside information is used to take advantage of the market that isn’t in the know.