BL Explainer: What is frontrunning?

Frontrunning is when a person, mainly a broker or an advisor, takes a buy or sell position in any stock based on exclusive knowledge that the recommendations being issued by them will certainly lead to price variation in the particular stock in the near future.

How does it work?

Stock market operators give `buy or sell’ recommendations in closed or private groups that have a higher subscriber base. Most of such recommendations are given on stocks where the liquidity is less and even a small amount of buying or selling can impact share prices. Multiple groups are formed on Whatsapp, which further spread these recommendations.

Why is it in the news now?

In December, 2021, SEBI conducted multiple raids in Ahmedabad and other parts of Gujarat and caught those running Telegram channel ‘Bull-run 2017.’ It had 52,000 subscribers and SEBI found that the operations who were running this channel first took positions in the counter they recommended to their subscribers. Also, the founders of Bull-run 2017 were not registered with SEBI, which is necessary for investment advisors.

Who can legally give stock tips?

Giving investment advice in ‘closed groups’ on social media by those who are not registered with SEBI is considered illegal as per investment advisor rules. Still, talking about macro ideas and stock market patterns or giving ideas on wide public platforms like television channels, online or newspapers is allowed. But rules prohibit people from giving specific stock tips on ‘closed groups,’ which are accessible only to limited members or work on subscription models. In any case, those giving stock tips even on television channels cannot indulge in frontrunning. Unless Registered with SEBI, a person cannot portray himself as an investment advisor. However, any investment advice given through any electronic or broadcasting or telecommunications medium, which is widely available to the public will not be considered as investment advice under applicable SEBI Regulations. General market comments in good faith in regard to trends or economic situations, which do not specify stock tips or investment products are exempt from SEBI rules. Also, brokers, distributors of mutual funds, fund managers and other SEBI registered intermediaries are exempt from investment advisor norms.

What is the difference between frontrunning and insider trading?

There is a thin red line that divides the two. Insider trading is when a person, who fits in the definition of a company insider as per SEBI rules, buys and sells stocks based on unpublished price sensitive information (USPI). Anybody from a company promoter, management officials, accountants or even key clients of the company fall under the definition of SEBI’s insider trading rules. When they use the UPSI, which is available to them by the virtue of their position or closeness to the company, to trade, they are said to have indulged in insider trading.

COMMENT NOW