Front Running

In News 

• Recently, Axis Asset Management Company suspended two fund managers for various irregularities, including front-running the AMC’s transactions on their personal accounts.

What is Frontrunning?

• It is a practice of dealing in securities on advance information of an upcoming transaction that could affect its price movement.
• It is illegal in India
• Sebi has categorised front running as a form of market manipulation and insider trading because a person who commits a front running activity expects security’s price movements based on the non-public information.
  •  Sebi has investigated and penalised several fund houses and fund managers in the past for front-running.
• How does it work?
  • Stock market operators give `buy or sell’ recommendations in closed or private groups that have a higher subscriber base. 
  • Most of such recommendations are given on stocks where the liquidity is less and even a small amount of buying or selling can impact share prices. 
    • Multiple groups are formed on Whatsapp, which further spread these recommendations.

• Front-running is hard to establish because it entails a fund manager using friends or other unrelated entities to buy stocks before the fund house buys it for its schemes. 
• The fund manager can use his or her network to purchase stocks before the fund house does, so that they can personally benefit from the price rise. 

Source:IE