-Front running is a term used in the financial world to describe an illegal and unethical trading practice. It involves taking advantage of non-public information about a trader’s impending transaction to make personal gains. This article will explain what front running is, how it works, its impact on markets, and how it applies to cryptocurrency trading.

To understand how front running operates, let’s start with the typical front running scenario that may occur in traditional markets.

1. Access to insider information

-Front running typically involves a broker or trader who has access to information about a large transaction. For example, a client might place an order to buy or sell a large number of stocks, bonds, or other assets.

2. Preemptive personal trade

-The broker, knowing the transaction will likely affect the asset’s price, buys or sells the same asset for their own account before executing the client’s order. If the client plans to purchase a large number of shares, the broker might buy shares at the current price, anticipating that the large buy order from the client will drive up the price.

3. Profit from market movement

-Once the client’s transaction is executed and the price moves as expected, the broker sells their shares (or closes their position) at a profit. The client’s order causes the market to react, benefiting the broker who acted on the information before the other market participants.

Example of Front Running in Traditional Markets

Let’s consider a hypothetical example to illustrate how front running works:

-A large institutional investor decides to buy 1 million shares of Company X.

-The investor places this order through their broker.

-The broker, aware that this large purchase will likely drive up the stock price, buys 10,000 shares of Company X for themselves before executing the client’s order.

-Once the client’s order is completed, the stock price rises as expected. The broker then sells their 10,000 shares at a higher price, making a quick profit.