1. Glossary
  2. Trading Terms
  3. Frontrunning

Frontrunning

Definition of ‘Frontrunning - Front running, also known as tailgating, involves illegally trading a financial asset using inside information about a transaction that will affect the asset price.

What is frontrunning?

Front running refers to trading a financial asset using information about a transaction that is not publicly available that will affect the asset price. Trading using insider knowledge is considered market manipulation and as such is illegal in most markets.

Front running is similar to insider trading. The difference is that insider trading involves a company insider using their knowledge of company activity to trade before a public announcement, whereas front running occurs when the trader is an external party.

Securities market regulators, such as the Securities and Exchange Commission (SEC) in the US, will bring fraud charges against traders alleged to have engaged in front running.

How does front running work?

The term front running comes from the days when traders and brokers waited on the floor of a stock exchange to observe a major share purchase being executed using paper contracts. Traders would typically walk between trading desks with their orders, but they would then run ahead of other traders to buy or short the stock based on the information before the share price reacted.

In modern trading, brokers can engage in front running if they receive an order from a client to make a large stock purchase, placing their own order to buy shares before executing the client’s purchase so that they profit from the price moving higher. The growth of automated trading has made it possible for trading robots, or bots, to spot opportunities for front running.

In cryptocurrency markets, miners and full node operators are exposed to information that constitutes front running if they use it to make transactions.

Crypto miners can use the delay in confirming transactions on the blockchain to front run them and place a trade for profit.

And full node operators, which monitor blockchain networks, are aware of a major trade in advance.

Traders can also observe the public mempool on a decentralized exchange (DEX) to see which transactions are awaiting blockchain confirmation.

Front runners attempt to gain an advantage by bidding a higher gas price, or processing fee, for their cryptocurrency trade so that miners process their transactions first and they can profit from the coin price movement caused by the high-value trade.

Front running bots have become common on the Ethereum blockchain, where gas fees are volatile.

FAQs

Is front running legal?

Front running on the securities markets is an illegal practice that can result in fraud charges from the financial regulator and criminal charges from local law enforcement. Cryptocurrency markets are unregulated, and the use of bots in front running transactions mean that while the practice is becoming more common, there have been no charges against crypto traders.

What is front running in crypto?

Front running in cryptocurrency markets involves miners, full node operators, and traders using their knowledge of pending blockchain transactions to trade coins or bid higher gas prices to get their transactions processed ahead of market-moving trades.

What does it mean when a transaction is front run?

Front running a transaction involves rushing to complete a trade ahead of a high-value transaction, to profit from the change in price it will cause.

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