1. What is the meaning of front running?

Broadly, front running in the securities market refers to the illegal practice of using non-public
information or confidential information, for buying or selling securities ahead of a large order (“ Big
Client Order”), in order to benefit from the subsequent predictable price movement post the
execution of such Big Client Order.
Some of commonly used definitions are as follows:

 Major Law Lexicon by P Ramanatha Aiyar

Front running – Buying or selling securities ahead of a large order so as to benefit from the
subsequent price move.
This denotes persons dealing in the market, knowing that a large transaction will take place in the near
future and that parties are likely to move in their favour.
The illegal private trading by a broker or market-maker who has prior knowledge of a forthcoming
large movement in prices. (Investment)
 Black’s Law Dictionary[3]:
Front running, n. Securities – A broker’s or analyst’s use of non-public information to acquire
securities or enter into options or futures contracts for his or her own benefit, knowing that when the
information becomes public, the price of the securities will change in a predictable manner. This
practice is illegal. Front-running can occur in many ways. For example, a broker or analyst who works
for a brokerage firm may buy shares in a company that the firm is about to recommend as a strong
buy or in which the firm is planning to buy a large block of shares.
2. How is front running dealt with under the Indian regulatory framework?
SEBI recognised front running as an undesirable manipulative practice, in its Consultative Paper
dated March 16, 1995,[4] and accordingly brought it within the ambit of the erstwhile SEBI
(Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations,
1995 (“1995 PFUTP Regulations”).
The erstwhile SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014[5], read
with the SEBI Circular dated May 25, 2012[6], categorically defined front running as, “‘front
running’ means 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.”
Currently, Regulation 4(2)(q) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices
Relating to Securities Market) Regulations, 2003 (“2003 PFUTP Regulations”), encompasses front
running as a fraudulent and unfair practice:
“Dealing in securities shall be deemed to be manipulative, fraudulent or an unfair trade practice… if
it involves any order in securities placed by a person, while directly or indirectly in possession of
information that is not publicly available, regarding a substantial impending transaction in that
securities, its underlying securities or its derivative;”
Pursuant to the landmark judgment of the Supreme Court in SEBI vs. Shri Kanaiyalal Baldevbhai
Patel and Ors.[7] (“Kanaiyalal Case”), and the consequent recommendations by the Committee on
Fair Market Conduct,[8] the scope of Regulation 4(2)(q) of 2003 PFUTP Regulations was broadened
to prohibit front running by non-intermediaries and individuals, w.e.f. February 1, 2019.
 3. Which are the entities involved in front running?
In the world of financial trading, a front-runner is commonly referred to as someone who gains an
unfair advantage with inside information.[9]
Regulation 4(2)(q) of the 2003 PFUTP Regulations envisages front running as a trade practice
undertaken by a person in possession (directly or indirectly) of non-public information regarding a
substantial impending transaction. Normally, this would apply to a person who trades while being
privy to a Big Client Order.  Interestingly, the RSL Order identifies two categories of people who can
perpetuate front running, viz.:
 Information carriers: Entities which have direct or indirect access to the non-public
information of the Big Client Order, are referred to as ‘information carriers’; and
 Front runners: Entities from whose trading accounts front running trades are
executed, are referred to as ‘front runners’.
In the past, although SEBI has held the tippers liable for fraud and manipulative practices, usually, the
specific charge of front running was applied to the entities that had actually undertaken the trades. By
relying on familial relationships, call records, bank account transfers, social media connections, etc.,
the RSL Order alleges a nexus between entities who fall in both categories and seeks to bring the
‘information carriers’ within the fold of Regulation 4(2)(q) as well, on the basis that they were
responsible for the trades executed through the accounts of the ‘front runners’.
4. What are the key elements for classification of trading as front running?
Per the RSL Order, following factors are considered necessary for classifying trading activity as front
running:
1. Possession of non-public information regarding the Big Client Order; and
2. Placing of order by the alleged front runner in securities (directly or indirectly) in advance of
the Big Client Order, while in possession of the aforesaid non-public information. Since, the
Big Client Orders are usually placed in smaller tranches, therefore, any order placed by the
alleged front runner on or before the time of last tranche of the Big Client Order, would
qualify as a front running transaction.
5. What are the modes of execution of front running?
Front running activity is normally executed in the following ways:
 Buy-Buy-Sell (“BBS”) – This pattern denotes ‘Buy’ by the alleged front runner, ‘Buy’
by the Big Client, followed by ‘Sell’ by the alleged front runner.
 Sell-Sell-Buy (“SSB”) – This pattern denotes ‘Sell’ by the alleged front runner, ‘Sell’
by the Big Client, followed by ‘Buy’ by the alleged front runner.
6. How is front running different from insider trading?
Conceptually, they are not particularly different. Both front running and insider trading are instances
of market abuse that are premised on a person/ entity having access to non-public information that
could influence the price of securities. While jurisdictions such as the US and Singapore, have
typically identified front running and insider trading as separate offences, the lines do get blurred. In
2019, a Singapore court convicted three individuals who had engaged in front running, for the offence
of insider trading; this was the first instance of front running being prosecuted as an insider trading
offence in Singapore[10]. Given that the insider trading laws in India treat any person having access
to ‘unpublished price sensitive information’ as an insider, the linkage to front running is even more
apparent. However, the regulator till date has not chosen to conflate these two offences and has
generally dealt with front running cases under the PFUTP Regulations only.