Front-Running

Front running is trading in advance of a pending order that you know about, to profit from the price move that order will cause. The classic illegal form is a broker who learns a client is about to buy a large block of stock and buys first, then sells to the client or into the rising price. It breaches the duty owed to the client and is prohibited in regulated markets. Related but different practices, such as anticipating order flow from public data, and new forms in crypto, such as MEV, raise questions about where the line sits.

The classic illegal form#

1. A client gives a broker a large buy order.
2. The broker buys the same stock for their own account first.
3. The client's large order pushes the price up.
4. The broker sells at the higher price, sometimes to the client.

Legal framework#

Front running versus anticipation#

The key distinction is whether the information came from a duty of confidentiality.

Front running in crypto: MEV#

On public blockchains, pending transactions sit in a public waiting area, the mempool, before they are added to a block. Bots can see a large pending swap on a decentralised exchange, submit their own buy with a higher fee to be processed first, then sell after the victim's trade moves the price. This "sandwich attack" is a form of maximal extractable value (MEV). Its legal status is unclear in many jurisdictions, but it imposes real costs on users. See MEV and Mempools and Gas.

Protecting your orders#

Information leakage#

Even without illegal front running, large orders leak information through their footprint in the market. Execution algorithms randomise size and timing to reduce the chance that others infer and trade ahead of them. See Market Impact.

Frequently asked questions#

What is front running?#

Trading ahead of a known pending order to profit from the price move it will cause, typically using confidential information about a client's order.

Is front running illegal?#

Yes, when it uses confidential information in breach of a duty, such as a broker trading ahead of client orders. Anticipating flows from public information is generally legal.

What is a sandwich attack in crypto?#

A form of MEV where a bot places a trade before and after a victim's pending decentralised exchange swap, profiting from the price move the victim causes.

Next, learn a rule that affects many US day traders in Pattern Day Trader Rule.