CM006 · Capital Markets

Front Running

Front running is a trader dealing on their own account ahead of a client order they know is coming, positioned in the same direction, then closing out once the client's order has moved the market. The finding is a convergence finding: it lives in how many seconds before the client's own order the trader's order was placed, how strongly the trader's pre-position direction correlates with the client order's direction, how disproportionate the profit captured is once the client order lands, and whether there is a documented knowledge linkage between the trader and the desk handling the client order.

MiFID II Article 16(3) requires firms to maintain effective organisational and administrative arrangements to prevent conflicts of interest from adversely affecting clients' interests, and Article 27 requires best execution. Trading ahead of a known client order — misusing knowledge of client order flow for the trader's own account — breaches both. Article 8 of the EU Market Abuse Regulation (MAR), which prohibits dealing on inside information, provides an analogous misuse-of-information framing applied here to client order flow rather than issuer MNPI. CM006 detects the trading- side signature of this misuse.

Risk indicators

Timing Ahead of Client Order

• Trader's own order placed only seconds before the client's order
• Order timing inconsistent with the trader's normal execution cadence
• Repeated pattern of dealing immediately ahead of the same client's flow

Position Correlation

• Trader's pre-position direction strongly correlated with the client order's direction
• Position sized and directed inconsistently with the trader's stated mandate
• Position concentrated around a single client's order rather than a market view

Profit Capture

• Realised profit disproportionate to the position's value once the client order lands
• Profit timing tightly coupled to the client order's execution
• Position closed out immediately after the client order completes

Client Order Knowledge Linkage

• Documented contact events with the desk handling the client order in the 90 days
• Contact frequency inconsistent with the trader's normal coverage relationships
• Trader has access to the client order management system or desk communications

Investigation actions

1. Resolve the trader, the desk and the client firm.
2. Compute the timing ahead of the client order (seconds the trader's own order was
3. Compute the position correlation (correlation between the trader's pre-position
4. Compute the profit capture ratio (realised P&L / position value).
5. Count the documented contact events with the desk handling the client order in the
6. Score each of the four components against its band cut-lines.
7. Aggregate the weighted exposure score; escalate at or above the threshold.

Related typologies

Curated from fc-07-capital-markets-analytics-toolkit/typologies/CM006_Front_Running.md