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Finance: What is Front Running? 3 Views
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Description:
What is Front Running? Front running happens when brokers know that a block trade (very big trade) is about to be made and they make a trade that will help them profit from the block trade. In other words, they know the big trade will affect the share price so they either buy or sell according to what they know will happen.
- Social Studies / Finance
- Finance / Financial Responsibility
- College and Career / Personal Finance
- Life Skills / Personal Finance
- Finance / Finance Definitions
- Life Skills / Finance Definitions
- Finance / Personal Finance
- Courses / Finance Concepts
- Subjects / Finance and Economics
- Finance and Economics / Terms and Concepts
Transcript
- 00:00
Finance allah shmoop what is front running All right you're
- 00:07
a b s d a big stock diviner your job
- 00:13
is to invest for the mega gargantuan billions of dollars
- 00:17
in assets mutual fund that you manage your kindly loving
- 00:21
trusted and for friendly broker at nah graham nad log
Full Transcript
- 00:26
c and bp group knows that you've been a hankering
- 00:30
for a big position in mega soft which has traded
- 00:34
down tto only fourteen times earnings well the bank has
- 00:38
set up meetings for you with senior management it's given
- 00:41
you reams of its own research on personal computer sales
- 00:44
declines and all kinds of dope on how mega soft
- 00:48
is doing so they know you're interested Then comes along
- 00:52
and ugly day in the overall market and mega soft
- 00:55
drops from twenty three bucks a shared a twenty two
- 00:58
along with everything else that's down big for five percent
- 01:02
You think now it's my time toe act a different
- 01:06
kind of acting meaning now it's my time to buy
- 01:08
twenty five million shares and yes that's a lot of
- 01:11
shares but you do that all the time in your
- 01:13
mega fund and twenty five million shares at twenty two
- 01:17
Bucks is now scootch over five hundred million dollars Since
- 01:20
your fund is twenty five billion in assets and while
- 01:23
that's only a two percent position for you So how
- 01:26
is your broker thinking about this Well she could sell
- 01:32
you those shares all of them and get a two
- 01:34
cent a share commission for the pleasure If she sold
- 01:37
you all twenty five million shares well that would be
- 01:41
half a million bucks in commission for one trade Yeah
- 01:45
nice work if you can get it But she has
- 01:47
her eye on the executive suite of nah Graham nad
- 01:51
lob c n b p group and really wants the
- 01:54
private bathroom with the waterfall rumored to be on the
- 01:58
fifty second floor So she thinks if i whisper to
- 02:02
my trusted trader tt that megha is buying twenty five
- 02:07
million shares while tt could go in front of mega
- 02:12
sze buying i front run him buy up everything at
- 02:16
twenty two dollars and then deal off the top of
- 02:19
his deck or sell two mega the shares he bought
- 02:22
it's a you know a twenty cent a share profit
- 02:24
like he buys it Twenty two even sells them at
- 02:27
Twenty two twenty on their way to twenty three and
- 02:30
higher The mega fund manager would even notice that twenty
- 02:34
cent difference Probably not Not if the bank does that
- 02:38
quickly and quietly and maybe brings in its foreign partners
- 02:43
to do so Well if they did this if they
- 02:45
front ran the mega mutual fund and bought shares ahead
- 02:49
of it on their own proprietary account well they'd make
- 02:52
twenty cents a share buying him in the morning and
- 02:54
selling in the afternoon That's twenty cents times twenty five
- 02:58
million shares now that's five million in gains tow her
- 03:02
firm Not just that measly two Sent to share commission
- 03:05
five hundred grand She'd keep like twenty percent of the
- 03:08
total here So um is it worth it Is it
- 03:11
worth it The five million twenty million dollars Well she
- 03:15
ponders and ponders and then decides it wasn't because front
- 03:18
running is patently illegal and her firm forbids it at
- 03:23
least notionally where they can control the behavior So her
- 03:27
career's over and she goes to jail Yeah moral don't
- 03:29
do this Hey at least she has a long string
- 03:32
to chat with tt on the men's side of the
- 03:34
prison too So you really don't want to do front 00:03:36.935 --> [endTime] running
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