Explained | What is front-running, the activity Quant Mutual Fund is accused of?

On Monday, it was reported that Sebi had conducted searches of Quant MF's offices in Mumbai and Hyderabad, following which it was reported that the fund house had agreed to cooperate fully with the probe that accuses it of front-running.

Quant Mutual Fund, one of the largest growing fund houses in India, has come under the scanner of India's markets regulator, the Securities and Exchange Board of India (Sebi) over alleged 'front-running' activities.

On Monday, it was reported that Sebi had conducted searches of Quant MF's offices in Mumbai and Hyderabad, following which it was reported that the fund house had agreed to cooperate fully with the probe.

In this context, we take a look at what 'front-running' is.

What is front-running?

According to a 2012 Sebi circular, front-running was defined as the "usage of non-public information to directly or indirectly buy or sell securities, or enter into options or futures contracts, in advance of a substantial order, on an impending transaction, in the same or related securities or futures or options contracts, in anticipation that when the information becomes public; the price of such securities or contracts may change."

A form of market manipulation, front-running involves trading in a particular stock or financial instrument by someone (a broker, dealer etc.) who has inside information about some future transactions that would impact the price of the stock or instrument in question.

This information, which is used by an intermediary for front-running, is not public and affects the price of securities on the market.

Similar to insider trading, front-running is considered to be a highly unethical business practice that undermines market integrity. The only difference between the two is that while information used in insider trading is company-specific, the information used for front-running does not often pertain directly to a company.

For instance, a front-runner with advance knowledge of analysts' recommendations may leverage the same to make profitable transactions, before such information is made public and reaches clients.

As far as legality goes, front-running is illegal in India.