The Bank Accused of Having a Problem With Front-Running

A European person, known hereafter as Person A, was found to have defrauded a client (Company A) of the major international bank (Company B) for which he worked. The banker was sentenced to two years in prison for front-running a significant order by Company A. He had ensured that he and other traders, as well as Company B, profited from the deal at the expense of the client.

In addition, another employee, Person B, claimed that front-running was endemic in Company B and that he was fired as a result of raising this issue with his manager.

This anonymised case study explains how front-running can damage the reputation of a business and diminish the trust that clients have in banks and other financial institutions.

What is front-running?

Front-running involves a trader using their knowledge of a significant forthcoming transaction by a client to buy stock in advance that will result in capital gains when the client’s transaction occurs and shifts the market.

It is also sometimes referred to as tailgating and, if it involves the use of inside information to make the trade, this is illegal. Moreover, the trader is bound to always operate in the best interests of a client. The act of front-running can cost the client money due to delaying the transaction. The trader’s personal transactions executed in this way can potentially make the price of the transaction less favourable.

Corporate Governance vs Real Governance

The background

Company A wanted to exchange the proceeds of a major sale, worth around €3.2 billion, into sterling. It asked Company B to carry out the transaction under strict confidence. Person A instead used this knowledge to purchase large amounts of sterling in his proprietary account, encouraging other traders to do the same.

By carrying out this action ahead of the exchange, which Person A executed in a manner intended to increase the value of the pound, Company B profited by nearly €7 million and the traders received improved bonuses. The authorities investigating the issue concluded that executing the deal in this manner had cost Company A “millions".

What happened next?

Person A was arrested, tried and convicted for his role in the transaction. He was sent to prison for 24 months as a result of his actions.

A couple of years later, Person B accused his employer, Company B, of having a problem with endemic front-running. He reported that he heard another trader admit he was going to front-run a client’s deal in front of a supervisor who took no action. Person B said he explained how the actions were detrimental to the client. However, he claimed that he was prevented from gaining promotion, suspended and had his annual bonus withheld when he escalated the issue. He said that he was then fired, claiming retaliation from his employer.

How to prevent front-running?

Companies can prevent front-running and other examples of market manipulation or abuse by running a pre-clearance procedure on employee trades. TradeLog automates this process. This means that any trades that would cause a conflict of interest with a client are flagged for review, helping maintain compliance and trust between the organisation and its clients.

Request a demo of TradeLog today for your business.