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Front-Running
Context:
Quant Mutual Fund is under regulatory scrutiny for alleged front-running, while Securities and Exchange Board of India (SEBI) banned eight individuals and ordered a return of Rs 1.3 crore for similar activities.
Front-Running
- It occurs when someone uses sensitive information about a fund’s trades to execute their own trades first, profiting from the subsequent price movements.
- A fund house official or broker leaks information about impending trades.
- An individual or entity then builds prior positions to profit when the fund’s large trade impacts the stock price.
- It is an illegal practice and one of the most serious stock market violations.
- It mostly occurs with large asset managers and intermediaries involved in bulk trades, as their transactions significantly impact stock prices.
- Detection of Front-Running
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- SEBI uses algorithms, data analytics, and supervision technology to track front-running.
- Since most trades are electronic, it is easier to identify front-running.
- Impact on Mutual Funds and Investors
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- Front-running damages the credibility of asset managers, leading to poor perception of their management practices.
- Investors of asset managers are not directly affected in most cases, but the institution’s reputation suffers.
- Regulatory Changes to Curb Front-Running
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- SEBI implemented an institutional mechanism for better surveillance and internal controls to identify misconduct.
- It recommends stringent actions against key officials of mutual funds involved in front-running.
- Association of Mutual Funds in India (AMFI) is developing a standard operating procedure (SOP) to prevent front-running activities.
- SEBI implemented an institutional mechanism for better surveillance and internal controls to identify misconduct.
Mutual Funds: 