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News: Recently, there was a case of front-running in the mutual fund business.
• Front-running is a dubious market practice in which a dealer, trader or employee gets wind of a big order for buying or selling shares that will be placed by a fund or big investor and gets ‘in front’ of the trade.
• Large orders usually move a stock’s price.
• By buying shares just before the big order hits the market and selling them once the price moves up, the front runner pockets illegal gains from his advance knowledge.
• However, Front-running by insiders can adversely impact investors in a fund by bidding up the prices they get to buy stocks or hammering down the prices at which they get to sell.
Are there any regulations made? What are actions proposed by SEBI?
• The SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 clearly define front-running and characterizes it as a fraudulent and unfair practice. SEBI has invoked this section many times to pass orders against front-runners.
• On the primary market front, the regulator is keen on enhancing disclosure and compliance requirement for listing of new-age technology companies.
• For the secondary market participants, it is keen on enhancing awareness around responsible investing as lot of new customers are going for speculative trading.
What else needs to be done to prevent it?
• Surveillance mechanisms of stock exchanges are most useful to uncover instances of front-running.
• Surveillance software that tracks real-time trades in the market is well-equipped to spot similar trading patterns between big investors and individuals, which forms the basis for front-running investigations by the regulator.
• SEBI will also need to consider more stringent punishments for information carriers and front-runners when investigations find hard evidence of wrongdoing.