Front Running [UPSC Economy Notes]

The Securities and Exchange Board of India (SEBI), in Feb 2023, took action against the former chief dealer of Axis Mutual Fund (MF), Viresh Joshi, and 20 other individuals, barring them from accessing the securities markets. In this context, understand what is front running in the context of the securities market for the IAS exam economy segment.

What is Front Running?

Front Running is a prohibited trading technique where an individual purchases or sells securities before a significant order is executed to gain an advantage from the resulting price shift. 

• This involves the use of undisclosed information by a broker or analyst to obtain securities or engage in futures or options contracts for their own advantage, knowing that when the details are released publicly, the security price will change in an expected manner.
• Front running is also called tailgating.
• Front running amounts to a type of insider trading since it involves non-public knowledge of upcoming trades.

Key details:

• SEBI’s surveillance system had generated alerts indicating that several suspected entities had executed trades that were in the nature of Front Running the trades of Axis Mutual Fund (MF) between September 1, 2021, and March 31, 2022. 
• These alerts also showed that not only were numerous entities suspected of front-running Axis MF trades, but several trading members of stock exchanges were also suspected of being involved in executing these trades. 
• Based on these alerts, SEBI conducted an investigation and found that these suspected entities and trading members worked in close coordination with each other to front-run the trades of Axis MF during the period.
• The investigation revealed that the leakage of information about the impending orders, which Axis MF was placing through diversified trading members, was possibly done at the end of a big client. 
• It was found that soon after the Axis MF orders were placed, the individuals connected to Viresh Joshi squared off their earlier trade positions taken on the exchange platform. 
• SEBI said in its interim order, that the investigation showed that these individuals were involved in front-running the trades of Axis MF in close coordination with each other.

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