FRONT-RUNNING - ECONOMY
News: SEBI tweaks mutual fund
regulations to stop front running in asset management companies
What's in the news?
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Recently, the Securities and Exchange Board of
India (SEBI) sanctioned amendments
to mutual fund regulations aimed at curbing front-running within asset
management companies (AMCs).
Front-running:
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Front-running refers to a scenario where a broker or investor engages in a trade using
pre-existing non-public information about a significant transaction, aiming
to gain economic advantages from potential changes in asset prices, equities,
or derivatives.
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It is alternatively termed as forward-trading or tailgating.
Legality - Front-running is deemed illegal
in India.
Occurrence:
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This unethical practice can manifest in various
markets, including stocks, commodities, and other financial sectors.
Common Strategies:
1. Buy-Buy-Sell (BBS)
Pattern:
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In this pattern, the alleged front-runner places a
buy order based on undisclosed information about a significant purchase order from a large client.
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Process: Upon the large client executing their buy order and
causing a rise in the security's price, the front-runner sells the securities
acquired earlier, profiting from the price increase.
2. Sell-Sell-Buy (SSB)
Pattern:
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In this pattern, the alleged front-runner places
sell orders in anticipation of a forthcoming
sell order from a significant client.
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Process: After the large client initiates their sell order,
resulting in a price decrease, the front-runner repurchases the securities at
the reduced price to meet their obligations, generating profit.
Differentiation from
Insider Trading:
Insider Trading:
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Insider trading involves trading securities based
on material, non-public information about a company.
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Participants: Insiders,
such as company executives or individuals with access to confidential data,
exploit privileged information for personal gain.
Front Running:
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Front-running entails trading securities based on
knowledge of pending orders or anticipated market movements.
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Participants: Brokers or
traders leverage their position or advanced expertise to prioritize their
trades over clients or the general public, often resulting in unfair
advantages.