What does 'front-running' mean in finance?

Front-running in finance refers specifically to the unethical practice of executing orders on a security for one’s own account while having access to nonpublic information about that security. This typically involves a broker or trader who learns about pending orders from clients—especially substantial ones that could significantly impact the security's price—and then trades on that information before executing the clients' orders.

This practice undermines the fairness of the market because it allows the front-runner to benefit from price movements that other investors are not privy to, thereby capitalizing on the knowledge that creates an unfair advantage. The key element of front-running is that it relies on nonpublic information, which is why it is considered unethical and is often illegal.

Other options do not capture the essence of front-running accurately. For instance, making trades based on public information is a standard practice in the financial markets and is not unethical. Buying at a lower price before a large market order does not necessarily imply the wrongful use of insider information; it can simply be a legitimate trading strategy. Finally, implementing trades after the market has closed pertains to trading practices but is unrelated to the concept of front-running, which is primarily concerned with taking advantage of confidential information before the public can react to it.