Front running is a form of market manipulation that occurs when a trader or entity places a trade based on advanced knowledge of another trader’s intended trade. In the context of crypto trading, front running typically involves an entity, such as a large institutional trader, placing a trade before executing a large buy or sell order on behalf of a client or customer.
For example, suppose an institutional trader receives a large buy order for a specific cryptocurrency from a client. Instead of immediately executing the client’s order, the trader places their own buy order first, knowing that the client’s order will soon follow and drive up the price of the cryptocurrency. The institutional trader can then sell their position at a profit once the price has increased, at the expense of the client.
Front running is illegal and is considered a violation of securities laws and regulations. It is also considered to be a breach of trust between the trader and the client, as the trader is using their privileged position to benefit themselves rather than acting in the best interests of their client. Investors should be cautious of traders or exchanges suspected of engaging in front running and should report any suspicious activity to the relevant regulatory authorities.