New Term: Front Running

I subscribe to Scottrade’s “Tomorrow’s News Today. Today’s edition talked about a term I hadn’t heard before called “front running.”

According to wikipedia, front running is defined as

the illegal practice of a stock broker executing orders on a security for their own account (and thus affecting prices) before filling orders previously submitted by their customers.

Here’s what Scottrade reported:

Study Finds Front-Running

Short selling spikes before public reports of large sales by a corporate chief executive, probably due to illegal “front running” on inside information, a new academic study concludes.

The study found short sales jumped 13% on average on

days when CEOs sell shares, with an additional 32,000

shares being sold short. Short selling peaks a day before

insider sales by the CEO become public and starts rising

sharply two days beforehand, according to the study, suggesting

information about the insider sale is leaked in advance.

The unpublished study, “Do Short Sellers Front-Run Insider

Sales?” examined 2,030 insider sales by CEOs from

January 2005 to May 2007. Increased short selling in

advance of public reports of CEO sales wasn’t concentrated

in any particular month or industry, but was more likely

ahead of larger sales, which typically affect stock prices

more than smaller sales.

It’s amazing to me (but it shouldn’t be) that a market, so perfectly conceived, like one we’ve concocted to trade stocks, can be so perversely manipulated by greedy people.

But, of course, I’ve always been inclined to believe that something like this has happened ever since the first stock was traded; I just didn’t know what it was called (except for illegal, unethical, immoral, and/or greedy).

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