Key Highlights

Front running is when someone exploits insider information and trades in advance to sell at a higher price.
Traders, brokers and analysts who work at mutual funds or insurance companies are more susceptible to committing this crime.
SEBI sets rules to define what comes under front running and what penalties will be faced.

Front running happens when brokers use advanced knowledge of a client’s trade to buy or sell stocks for personal profit. It’s unethical, unfair, and completely illegal.

If we put it simply, then, ‘Pehle khud kama lo, phir client ka order lagao.” But is this legal? Not at all.

For example, A client tells his broker to buy 10,000 shares of ABC Ltd. at ₹100/share. The broker knows this big order will increase the price. So, before executing the client’s trade, he buys 2,000 shares at ₹100 for himself.

After placing the client’s order, the price rises to ₹108. The broker then sells his shares at ₹108, earning a risk-free profit of ₹16,000. The whole ‘Golmaal’ has been summarised in the table given below.

Step	Action
Client’s order placed	Buy 10,000 shares at ₹100
The broker buys for himself	Buys 2,000 shares at ₹100 = ₹2,00,000
Client’s large order executed	Demand rises. New Stock price = ₹108
The broker sells his shares	Sells 2,000 shares at ₹108 = ₹2,16,000 Profit = ₹16,000

The client ends up buying at a higher price, while the broker earns ₹16,000, without taking any market risk.

Front running may sound exciting, and you may have an itch to try it for yourself, but, IT IS ILLEGAL! That’s why regulatory bodies like SEBI and SEC treat it as a serious offence. Let’s learn more about front running and see why it is illegal through legal means, by reading this blog, silly!

What is Front Running?

Do you know about the infamous Axis Mutual Fund case? Apparently, a former chief dealer named Viresh Joshi, along with 21 others, exploited their position to execute trades. They had used confidential information about large client orders and earned lots of profit. However, all of that was illegal. That is when SEBI intervened, assets were seized, and markets were banned. It was reported that the Indian Enforcement has seized ₹12,90,000 ($15,360),

What Viresh and his colleagues did is called Front Running. To prevent investors from such scrutiny, SEBI has increased investigations and is working on maintaining a fair, transparent, and trustworthy securities market in India.

How Front Running Works in India’s Stock Market?

Traders, brokers, or analysts work with insider information. They have access to a large pending order, such as a mutual fund's bulk buy or sell. They then trade themselves before that large order takes place in the market. Then, the price increases and the investor either has to sell at lower prices or buy at higher ones.

For example, a mutual fund plans to invest ₹400 crore in shares of Company X, which has modest liquidity. A broker quickly buys ₹1,00,00,000 of Company X shares beforehand. If the mutual fund’s massive purchase drives the share price up by 4%, the broker earns a ₹4,00,000 profit.

The table below summarises the events that took place in the example.

Step	Mutual Fund Action	Broker Action	Price Effect	Profit
1	Plans to invest ₹400 crore in Company X	Learns the order secretly	-	-
2	Order size = 80,00,000 shares at ₹500 each	Buys ₹1,00,00,000 = 20,000 shares at ₹500	-	-
3	Mutual fund order lifts price +4%	Holds 20,000 shares	Price rises to ₹520	-
4	-	Sells 20,000 shares at ₹520	-	₹4,00,000 profit

The broker earns ₹4,00,000 without taking any risk. The investors, on the other hand, pay ₹20 more per share.

When does Front Running Happen?

Front running often happens when large institutional investors like mutual funds or insurance companies place big trades. It is at this time that
insiders, such as dealers or brokers, use this knowledge to pre-trade in their accounts.

Read More – SEBI Warns Investors: Avoid These Platforms to Protect Your Investments

Why is Front Running Illegal in India?

In the above example, the broker stole ₹20 per share from the investors indirectly. It is unfair and causes financial harm to retail investors.

Using the previous example, let’s understand more about why this act is illegal with the help of this table.

Reason	Explanation (with Example)	Impact on Investors
Unfair Advantage	Broker profits ₹4,00,000 from a ₹1,00,00,000 early trade, while retail investors buy at an inflated price of ₹520	Retail investors overpay, losing potential ₹20 per share
Market Manipulation	Large fund order (₹400 crore) pushes stock 4% temporarily.	This creates misleading signals for investors tracking the stock
Breach of Trust	A dealer entrusted with a client order misuses data to earn ₹4,00,000 privately	Investors lose faith in mutual funds/brokers

Thus, the broker’s action creates an illusion which misled the investors who track that stock. This creates monetary losses for the broader public, making front running both a financial crime and a trust violation.

Legal Framework in India

Front running is unethical and illegal in India. That is why SEBI (Securities and Exchange Board of India) has created a strong framework to regulate such practices. These rules define what counts as front-running and what does not. They have also set penalties and consequences for the defaulters.

Regulations & Laws

SEBI’s Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations, 2003, clearly ban trading on sensitive information related to “substantial impending transactions.” It means what we have already learned in earlier sections.

Law/Regulation	Year	Key Provision	Impact
PFUTP Regulations	2003	Bans trading on non-public information of large transactions	Defines front-running as market manipulation
SEBI Circular	2012	Specifically categorised as front-running as fraud	Removes misunderstanding and makes rules clearer

These laws were introduced to prevent any illegal activities and mention the consequences that violators will face.

SEBI Act Penalties

Violations of front running come under Section 15HA of the SEBI Act (1992). Penalties are there to prevent people from performing malpractice. Offenders can be fined a minimum of ₹5,00,000 to up to ₹25 crore. They can also be fined three times the illicit profit, whichever is higher.

Section 15J of the SEBI Act looks at these points:

(a) How much unfair profit or benefit was made because of the default, if it can be measured

(b) How much loss did the activity cause to an investor or a group of investors

(c) Whether the default happened more than once.

In addition, Section 24 allows criminal prosecution, meaning imprisonment in serious cases.

Provision	Fine	Alternative Penalty	Additional Punishment
Section 15HA	Up to ₹25 crore	3× illicit profit (if higher)	SEBI can ban trading
Section 24	-	-	Imprisonment

These penalties were necessary to introduce to maintain trust in the market and prevent anyone from doing wrong deeds. If performed, these penalties will lead them to face the consequences of their actions.

What’s the Reality of Everything?

You might ignore this as any other theoretical topic, but some people have committed crimes and face SEBI’s wrath. Let’s discuss one of them in this section.

Also Read - Strengthening Regulations Can Protect Investors And Promote Transparency In Financial Markets

Sanjiv Bhasin (IIFL, June 2025)

Sanjiv Bhasin was a former IIFL Securities director and prominent TV stock tipster. He was found to have traded in stocks via related entities before publicly recommending them. ‘Toh kya kara uncle ne?’ Front running. In response, SEBI froze his account, his profits and banned him from the market.

The table below gives further details about the case.

Detail	Value
Period Investigated	Jan 2020 - Jun 2024
Unlawful Gains Impounded	₹11.37 crore
SEBI Action	Barred from trading; accounts frozen
What Sanjiv Did	Bought via related accounts Recommendations on media (mentioned in the next row) Sold at an inflated price
Media Channels Used	Zee Business, CNBC Awaaz, ET Now, IIFL’s Telegram

This case shows how front running is not only a means of manipulating markets, but also plays with investors’ trust. That is why, SEBI’s strict actions are a necessity in such cases.

Conclusion

Front running sounds good and profitable, but it is completely illegal in India. The market needs to be fair for investors to invest with trust and ensure their information is secured and not exploited. To ensure this happens, SEBI steps in with its rules and penalties. It looks after transparency, accountability, and investor protection in financial markets.

Frequently Asked Questions

What’s the difference between FCFF and FCFE?
FCFF (Free Cash Flow to Firm) measures cash available to all capital providers (debt + equity); FCFE (Free Cash Flow to Equity) is the cash left for shareholders after interest and debt repayments. Use FCFF for enterprise valuation and FCFE when focusing on equity returns.

Do buybacks, dividends and capex choices change future FCF?
Buybacks reduce cash reserves in the short term, and high capex lowers FCF now but can raise it later by improving productivity.

How does industry seasonality affect FCF analysis?
Seasonal businesses require multi-period tracking, and FCF margins should be compared with peers for a fair view.

Can accounting standard changes (e.g., lease capitalisation, revenue recognition) distort FCF?
Accounting changes like lease capitalisation or revenue recognition can distort reported FCF, so it’s important to check the cash-flow statement and notes for accuracy.

What is front-runner slang?
In slang, a “front runner” means someone who supports or backs only the side that is already winning. In finance, the meaning is different and illegal.

What is pre-hedging?
Pre-hedging is when a broker executes trades to manage risk before fulfilling a client order. Unlike front running, it can be legal if done transparently and in the client’s best interest.

What is spoofing in trading?
Spoofing is placing fake buy/sell orders with no intent to execute, just to manipulate prices. It is different from front running but is also considered illegal market manipulation.