FORNT RUNNING :-
The concept of fornt running is used in stock market. It means supply of non-public information to stock broker or associates by mutual fund staff. It is categorised as a sort of market manipulation and insider trading by the Securities Exchange Board of India (SEBI) since a person who engage in it expect securities price movement based on non-public information.
Modus Operandi (how fornt runners make their money) :-
Step 1. Investment team of mutual fund identifies a stock and decides to buy.
Step 2. Fund house staff who knows this supply this information regarding the stock selection to broker or other associates.
Step 3. Broker or associate buys that stock in large quantity or takes leveraged position.
Step 4. Fund house places buy order with broker.
Step 5. Stock price moves up due to large purchase order by mutual fund house.
Step 6. Broker or associate sell stock, exist leveraged position with big profits.
IMPACT ON MUTUAL FUND INVESTOR :-
Though front running is unethical and illegal practices, it does not really hurt the common investor in stock market as well as mutual fund investor. Particularly in mutual fund context front running practices does not affect investors. Front Running may influence the price of small cap and mid cap in to some extent but in case of large cap fund it does not have any affect. Front running does not affect the mutual funds portfolio by at large.since a mutual fund portfolio is made up of many different companies' share, a considerable change in the price of two or more share will hardly affect the investor overall investments. So investor should not panic and react quickly rather it is advisable to wait and see how fund house following up on this news.
It is true, front runner make big money but not the expense of mutual fund investors. Sellers the only person from whom the front-runner buy the stock are possibly the only one who lose out.
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