Front Running
Front running is trading ahead of a known, imminent customer order — usually a large block — to profit from the price move that order will cause. Brokers who do it breach their duty to customers, and FINRA rules prohibit it.
If you knew a pension fund was about to buy a million shares, you could buy first and sell to them at a higher price. That is front running, and it turns a broker's privileged view of customer orders into a private profit. This entry explains what counts as front running, the rules against it and how the idea shows up in crypto.
- Category
- Market Structure
- Reading time
- 4 min
- Also called
- Front-running, Trading ahead, Tailgating
- Updated
Front running in plain words
FINRA Rule 5270 prohibits trading on material, non-public information about an imminent block transaction before that information becomes public.1
In equities, a trade of 10,000 shares or more is generally treated as a block, though smaller trades can qualify.1
Separately, FINRA Rule 5320 generally bars a firm holding a customer's order from trading the same stock on the same side ahead of it.2
How front running works, step by step
A big order arrives
A client asks a broker to buy a large block. See Block Trade.
The broker knows first
The information isn't public.
The broker trades ahead
Buying for its own account first.
The block moves the price
Large orders push prices. See Market Impact.
The broker profits
Selling at the higher price.
The customer pays more
The breach of duty harms the client.
Worked examples
Example 1 — The profit taken
Illegal profitA broker learns a client will buy 500,000 shares. The broker buys 20,000 at $40.00; the block lifts the price to $40.50.
| Broker's gain | 20,000 × $0.50 = $10,000 |
| Status | Prohibited front running |
Trading ahead of an imminent block using non-public knowledge of it is the practice Rule 5270 bans.1
Example 2 — The client's cost
Client pays $25,000Because of the broker's buying, the client's average price rises by $0.05 on 500,000 shares.
| Extra cost | 500,000 × $0.05 = $25,000 |
Front running places the firm's interests ahead of its customer's, which can also break other FINRA rules.1
Example 3 — A permitted trade
AllowedA firm's trading desk is behind an information barrier and never sees the block order.
| Knowledge of the block | None |
| Status | Generally permitted |
Trades the firm can show are unrelated to the order information, such as those behind information barriers, are not covered.1
Front running vs insider trading
| Aspect | Front running | Insider trading |
|---|---|---|
| Information | A pending customer order | Company news |
| Typical culprit | Broker or trader | Insider or tippee |
| Victim | The customer | Other investors |
| See also | Rules 5270 and 5320 | Insider Trading |
Where front running matters
Broker oversight
Firms monitor staff trading. See Best Execution.
Large institutional orders
Blocks are split to hide size. See Iceberg Order.
Crypto mempools
Bots copying visible pending transactions. See Maximal Extractable Value.
Order flow debates
Who sees orders first. See Payment for Order Flow.
Advantages and disadvantages
Advantages
- Clear rules protect customers.
- Information barriers allow firms to operate.
- Enforcement improves market trust.
Disadvantages
- Hard to detect.
- Grey areas around non-block orders.
- Similar tactics in crypto are less regulated.
Going deeper
Read as far as you need. Each level builds on the one before it.
When information is public
Beginner
Block information counts as public once it is shown on a last-sale reporting system, an exchange or ATS feed, or a news wire.1
Partial knowledge counts
Intermediate
The ban can apply even if the trader knows less than all the terms, as long as the material terms have been or will soon be agreed.1
Disclosure and opt-in
Advanced
Under Rule 5320, firms can sometimes trade alongside institutional or large orders if they disclose their practices and the customer consents.2
Common mistakes
Thinking small orders are fine
Other rules still apply.
Confusing it with anticipation
Guessing flows from public data is not front running.
Ignoring crypto versions
Mempool front running is common on blockchains.
Assuming firms can't trade at all
Barriers and exceptions exist.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Front running is trading ahead of a known customer order.
- FINRA Rule 5270 bans it for imminent block trades.
- Rule 5320 restricts trading ahead of held customer orders.
- It breaches a broker's duty to clients.
- Similar tactics exist in crypto mempools.
Frequently asked questions
Is front running illegal?
What is front running in crypto?
Can retail traders front run?
Further learning
- Block Trade
The orders most at risk.
- Insider Trading
A related abuse of information.
- Best Execution
A broker's duty to clients.
- Dark Pool
Where large orders try to hide.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.