Legging In

Finance allah shmoop what is front running All right you're

a b s d a big stock diviner your job

is to invest for the mega gargantuan billions of dollars

in assets mutual fund that you manage your kindly loving

trusted and for friendly broker at nah graham nad log

c and bp group knows that you've been a hankering

for a big position in mega soft which has traded

down tto only fourteen times earnings well the bank has

set up meetings for you with senior management it's given

you reams of its own research on personal computer sales

declines and all kinds of dope on how mega soft

is doing so they know you're interested Then comes along

and ugly day in the overall market and mega soft

drops from twenty three bucks a shared a twenty two

along with everything else that's down big for five percent

You think now it's my time toe act a different

kind of acting meaning now it's my time to buy

twenty five million shares and yes that's a lot of

shares but you do that all the time in your

mega fund and twenty five million shares at twenty two

Bucks is now scootch over five hundred million dollars Since

your fund is twenty five billion in assets and while

that's only a two percent position for you So how

is your broker thinking about this Well she could sell

you those shares all of them and get a two

cent a share commission for the pleasure If she sold

you all twenty five million shares well that would be

half a million bucks in commission for one trade Yeah

nice work if you can get it But she has

her eye on the executive suite of nah Graham nad

lob c n b p group and really wants the

private bathroom with the waterfall rumored to be on the

fifty second floor So she thinks if i whisper to

my trusted trader tt that megha is buying twenty five

million shares while tt could go in front of mega

sze buying i front run him buy up everything at

twenty two dollars and then deal off the top of

his deck or sell two mega the shares he bought

it's a you know a twenty cent a share profit

like he buys it Twenty two even sells them at

Twenty two twenty on their way to twenty three and

higher The mega fund manager would even notice that twenty

cent difference Probably not Not if the bank does that

quickly and quietly and maybe brings in its foreign partners

to do so Well if they did this if they

front ran the mega mutual fund and bought shares ahead

of it on their own proprietary account well they'd make

twenty cents a share buying him in the morning and

selling in the afternoon That's twenty cents times twenty five

million shares now that's five million in gains tow her

firm Not just that measly two Sent to share commission

five hundred grand She'd keep like twenty percent of the

total here So um is it worth it Is it

worth it The five million twenty million dollars Well she

ponders and ponders and then decides it wasn't because front

running is patently illegal and her firm forbids it at

least notionally where they can control the behavior So her

career's over and she goes to jail Yeah moral don't

do this Hey at least she has a long string

to chat with tt on the men's side of the

prison too So you really don't want to do front 00:03:36.935 --> [endTime] running