The board of Securities and Exchange Board of India (Sebi) approved changes in mutual fund regulations to prevent front running in Asset Management Companies (AMCs).
About Front Running:
- Front running is when a broker or trader uses advanced, non-public information about client orders to execute their own trades first.
- It is illegal in India and considered unethical as it disrupts market fairness.
- This practice aims to profit from the anticipated price movement caused by large client orders that have yet to be executed.
- It damages confidence in the financial markets and creates an uneven playing field.
Buy-Buy-Sell (BBS) Trading Pattern:
- The BBS pattern involves a trader acting on non-public information about an upcoming large buy order.
- The front-runner places their own buy order before the large client’s order.
- When a large client’s buy order is placed, it raises the security’s price.
- The front-runner then sells their holdings at this increased price, securing a profit.
Sell-Sell-Buy (SSB) Trading Pattern:
- In the SSB pattern, the trader uses non-public information about an impending large sell order.
- The front-runner places sell orders before the big client’s sell order is executed.
- This anticipates a drop in the security’s price, allowing the front-runner to rebuy the same security at a lower price later.
- The goal is to profit from the price differential created by the anticipated market reaction to the big client’s sell orders.
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