‘Front running’ or ‘forward running’ is an illegal practice that takes place when a dealer or a trader buys or sells the shares of a company before his organization does so, thereby manipulating a rise or fall in the price of the stock, as a result of his company’s trading. Although it is a prohibited action, it is widely prevalent in stock markets across the country. When a trader or dealer indulges in front running, he performs an unethical act by placing his own interest above the organizational interests of his firm. It can take place with all types of stocks, irrespective of whether they are large cap funds, mid-cap funds, or small-cap funds. However, the general notion is that mid-cap and small-cap funds can easily fall prey to this malpractice as they possess lower liquidity and float as compared to large-cap funds. Also, when orders for mid-cap and small-cap funds are made in bulk, they are more susceptible to price fluctuations than any other category of funds. Thus, small-cap funds can be easily exploited by traders and dealers in the market.
In order to control this discerning phenomenon from spreading widely, asset management companies, big brokerage units, and mutual fund houses have a strict compliance process in place to control the actions of their key personnel. It is mandatory for all fund managers and analysts in the organization to acquire prior permission and clearance before buying stocks from their personal account in the market. Also, dealers or traders of the organization are required to switch off their cell phones during trading hours while they are in the dealing room. They thus, have to access the landline to make any important phone calls, which are recorded in the organization. These records are maintained for as long as 10 years by the firm to uncover and investigate any suspicious activity by the employee of their organization. There is also a compliance department which is responsible to watch out for any irregularity in trades in a proactive manner. If any employee is found guilty of front running or any other unacceptable activity, they are liable for strict action against them, including dismissal from employment.
Always remember that it is not every day that are market days. Daily trading can be a huge risky bet. One wrong move and all your finances can be drowned in the market without any trace, the recovery of which will require lots of patience and more money to be invested. This can also prompt some unfortunate investors to opt for debt like personal loans, home loans etc to finance their financial requirements just because they might have lost their entire savings due to financial imprudence or more or less due to greed. Therefore in order to avert yourself from any such unlikeable situations, make sure you opt for the legal avenues of investments, which although require good levels of patience provide the desired returns over the years since in the long run, this is what is going to matter than the illegal routes. Also, if you come into the judicial vigilance, you are even bound to be penalized for your acts thereby leading to further unwanted situations and making you liable to much more than just finance. Therefore, be safe and be legal as it can protect you from such circumstances and help you accumulating funds in the right manner.
It is thus, important for traders, dealers, and other employees of the organization to refrain from indulging in such unethical practices as it hinders the performance of the manner, manipulating returns. Companies need to keep a close watch on their employees to prevent and put an end to these practices as well.