Over 700 finance terms, Shmooped to perfection.
Front running is a really mean thing to do. But it's often such a lucrative practice that it is a constant problem for banks and money managers to deal with. Here's the problem: Giant Mutual Fund X wants to sell 50 million shares of Exxon. Their trusted Giant Broker Y is happy to handle the order. In a fair world, Giant Broker Y would solicit bids for blocks of shares ideally small enough so as not to move the market" or bring the price of the stock down more than a dime or two in the process.
But what if Giant Broker Y has its own funds, which it manages for itself on behalf of the partners of its firm? And what if Giant Broker Y could make $2 a share on 50 million shares by using options in a transaction which it executes ahead of Giant Mutual Fund X's order.
As with many things in life, the problem is the money. If "all they took" was a commission for being an agent on behalf of Giant Mutual Fund X they might make 5 cents a share or $2.5 million. Hmm... $100 million vs. $2.5 million... How much is a trader's soul worth?