Anton Legal Group – The Front Running Stock Broker Fraud

Definition of the front running stock broker fraud

Front running is a type of stock broker fraud where the broker makes securities trades based on information their clients don’t have. Usually this happens when a stock broker finds out a firm will, in the future, be marketing a particular stock product, which will inevitably drive up the cost of the stock. The broker then buys up a quantity of that securities product, waits for the firm to market the product, inflating the cost, and then sells his personal shares to his clients at the inflated rate.

Another example is when a stock broker finds out a report will be released which will, in the future, drive up the cost of a securities product. The broker purchases the stock, waits for the report to be released, and then sells his personal shares to his clients at an inflated rate.

The front running stock broker fraud isn’t always illegal

While front running is thought of as unethical, this parasitic type of stock broker fraud is not always illegal. A couple of examples of completely legal front running are:

  1. Penny Jumping. This happens when one stockbroker uses his knowledge of another stock broker’s buy limit order to pad his personal risk of loss. A buy limit order says I, as a broker will buy X amount of a security for Y amount of dollars. An example of penny jumping is when a stock broker or firm says “I will buy 100,000 shares for no more than $50 dollars a share.” The stock broker next to him acts on that information and puts in a smaller buy limit order for 10,000 shares of the same stock for $50.01. Buy doing this, he not only profits when the stock goes up but, if it goes down, he can sell his 10,000 shares to the first stock broker for a total loss of one penny, dramatically limiting his risk on the investment and passing it on to the first stock broker.
  2. Large buy front running. Sometimes, simply watching market trends from the inside can lead to front running. For example, lets says Goodyear Tire and Rubber Company wants to move 8% of it’s employee benefit 401K portfolios from Pepsi to Coca Cola. Goodyear will not be able to purchase $5 Billion in Coca Cola stock all at once. It will break up that purchase into smaller transactions. Brokers watching Goodyear’s activity see the first transaction and rush to purchase Coca Cola stock, inflating the price for Goodyear’s employees and bringing a nice profit for the broker. If the broker noticed Goodyear’s activity on his own, it’s completely legal. If the broker found out about the transactions through an employee of Goodyear or used any other type of insider information to gain the knowledge of the transaction, it is a front running stock broker fraud and completely illegal.

The best help with stock broker fraud

If you are not getting anywhere with possible stock broker fraud, call S. David Anton of Anton Legal Group!

S. David Anton, Esquire is a Certified Arbitrator for the Financial Industry Regulatory Authority (FINRA), formerly the NASD, which is the national organization responsible for overseeing the securities industry. He has served as a Judge/Panelist and rendered decisions in many securities arbitration, giving him a unique perspective on his client’s cases.