Front-Running is described in the book Flashboys and relies on an information advantage, that is apparently provided by the exchanges to a select few.
Is said practice somehow different from insider trading?
Add a comment
|
2 Answers
It’s not insider trading
Insider trading refers to leveraging private information that you only know because of your “insider” position.
Front running is using information that is publicly available, albeit for a fee. Buying information that anyone can buy is not insider trading.
-
1"Because of your insider position": The insider trading laws in the US do not make a distinction about the circumstances behind one's possession of material nonpublic information. It's illegal to use it regardless of why you have it. If the information that enables front running is truly available only to "a select few" then I don't see how it can be public.– phoogCommented Apr 25, 2020 at 17:31
-
@phoog front running generally relies on having trading servers colocated with the exchange's computers, giving them a few milliseconds head start over cheaper connections to the exchange. Such arrangements are publicly available for purchase if you have the money. It only differs in degree from having a Bloomberg terminal on your desk versus relying on cable news for your financial information. Commented Apr 25, 2020 at 17:57
-
@CharlesE.Grant so if the selection of the few is based solely on ability to pay, it's not a private group? Does that mean a company can form a club open to anyone willing to pay a certain price and publish information to the members of this club so they can legally trade on it before it is published to the rest of the world?– phoogCommented Apr 25, 2020 at 18:47
-
@phoog apparently so, since public markets everywhere, including the US have always charged for faster access to market data. See also Investopedia: Front Running for some of the subtleties. Commented Apr 25, 2020 at 19:31
The term "insider trading" is generally used to refer to when someone trades on information from the company whose stock they are trading. "Front running" is generally used to refer to when someone is acting as an agent on behalf of a client trying to buy stock, and uses information that the client gives them about what stocks they want to buy to buy that stock for themselves. For instance, if a someone places an order large enough to move the market with their broker, the broker may first buy the stock, then send their client's order through, then sell their own stock, now at a higher price. So in both cases, someone is misusing information that they were entrusted with, but the source of that information differs.
