Market regulator Securities and Exchange Board of India (SEBI) has conducted search operations at two premises of Quant Mutual Funds on suspicion of front-running. SEBI has conducted search operations at Quant’s head office in Mumbai and Hyderabad. Suspecting front-running transactions by a dealer or a brokerage, SEBI questioned Quant Mutual fund dealers and persons connected with the case, Moneycontrol reported.
Quant Mutual Funds, the fastest growing MF in the country with asset under management (AUM) of more than ₹90,000 crore, issued a statement saying it will cooperate with the regulator.
What is front-running?
Front-running, also known as tailgating, is a form of market manipulation.It is trading in a stock or a financial instrument by a broker who has inside information about a future transaction that would affect its price. The broker works on the basis of information that is not out in public, on whether a firm is about to buy or sell, or issue recommendations, that would affect the price of securities in the market.
SEBI defines front-running as an unethical practice where brokers trade an equity based on information from the analysis department before their clients have been provided the information. A fund manager /broker buys or sells securities in advance of a substantial client order, or a futures or options position is taken about an impending transaction in the same or related futures or options contract.
Front-running is almost similar to insider trading. The difference is that in case of front-running, the information used is about client orders or upcoming brokerage recommendations, not directly related to the company itself. In case of insider trading, the information used is confidential, company-specific information, not available to the public.
A method through which front-running is done is through using information about analysts’ recommendation before it is made public.
Analysts give recommendations on stocks to buy or sell or hold to its clients. Such recommendations used by brokers before it reaches its clients is front-running.
Commonly used patterns for front-running are buy-buy-sell trading pattern and sell-sell-buy trading pattern. In the buy-buy-sell pattern a front-runner uses non-public information regarding an impending buy order by a client and places his buy order before the client’s order. In the sell-sell-buy pattern the front-runner uses the non-public information regarding an impending sell order of the client, and places sell order before the client. This manipulates the market.
Front-running is illegal in India. SEBI had recently approved amendments in its mutual fund regulations to curb front-running and fraudulent transactions. In April, SEBI barred eight entities from the entities on alleged front-running activities.
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Published: 24 Jun 2024, 10:30 AM IST