About a month ago I was listening to a BBC news program that indicated the majority of share trades on both Wall Street and the LSE (London Stock Exchange) in the last year involved front running. A further study revealed that there are two varieties of front running:
Note that investment banks trade both for clients and for themselves
1) Large investment bank can front run their own large clients by knowing that a client has placed an order for a very large share transaction and then trading just ahead of their client for the bank's own account.
2) Investment banks can use very high frequency trading to front run all large block trades. This happens when a large institution, say an insurance giant, starts to trade a large block of shares. It will do so in several increments, so as not to move the market too much. The front runner detects the first increment and trades just ahead of the second.
Apparently, Goldman Sacks has admitted to doing this.
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