What is Front Running? SEBI Exposes Rs 2.72 Cr Scam, Bans 6 for Misusing Client Trade Info

The Securities and Exchange Board of India ( SEBI ) has unveiled a significant scandal in the stock market involving front-running—a deceitful trading practice where brokers capitalize on prior knowledge of large client orders.

Recently, SEBI issued an interim-cum-showcause notice to Madhav Stock Vision Pvt Ltd (MSVPL) and its associates, demanding disgorgement of unlawful earnings and imposing market bans.

What Is Front Running?
Front running occurs when brokers or traders execute trades using confidential information about impending substantial transactions from clients. This unethical tactic allows them to profit from price fluctuations before executing the client's order, manipulating market prices and breaching fiduciary duties.

SEBI's Findings: Proximity and Privileged Information
SEBI's investigation revealed that individuals at MSVPL gained unauthorized access to non-public information (NPI) regarding the trades of a major client. This information was transmitted from the dealing desks of four stock brokers, exploiting their physical proximity to each other to gain an unfair advantage in trading.

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According to SEBI's Whole-time Member Kamlesh Varshney, "The proximity of trading terminals enabled the passing of NPI, facilitating MSVPL's front-running activities." This proximity facilitated the illicit transfer of NPI related to impending transactions, enabling MSVPL to execute trades ahead of the client, following strategies like SSB and BBS.

Why is Front-Running Illegal?
Front-running undermines market integrity by creating artificial demand and distorting stock prices. It gives insiders an unfair advantage over ordinary investors and breaches the fiduciary duty of brokers to prioritise client interests. SEBI's punitive actions against MSVPL underscore the severity of such malpractices in financial markets.
 

Regulatory Response and Consequences
SEBI's order includes fines and market bans against MSVPL and its associates, citing violations of the SEBI Act and the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations.

The regulatory body condemned the orchestrated scheme designed for personal gain, highlighting the misuse of NPI to deceive investors and unlawfully profit from stock market transactions.