Front Running and Insider Trading | 02 Jul 2024

Source: ET

Recently, a mutual fund in India has been under investigation by the Securities and Exchange Board of India (SEBI) for suspected front-running.

• Front-running or tailgating is an illegal practice under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 where fund managers place their orders ahead of large trades to profit from expected price changes.
  • This occurs when someone (an insider or broker) trades ahead of others using privileged information.
• Insider trading occurs when someone with a vested interest in a company uses non-public information to make a trading decision.
  • Insider trading usually involves company executives or employees leveraging confidential company information to gain an advantage in the stock market.
  • On the other hand, front-running typically involves brokers or fund managers exploiting knowledge of their clients' upcoming trades.
• In India, insider trading is prohibited under the SEBI Act, 1992. SEBI has established the SEBI (Prohibition of Insider Trading) Regulations, 2015, which outline the rules for prohibiting and restricting insider trading.
• These practices undermine investor confidence in the fairness and transparency of financial markets.

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