Front-running – Applicable to non-intermediaries?

Front-running is an illegal practice where, a stock broker or any other intermediary derives benefit from the advance knowledge of its customer™s trade.


The Eight edition of Black™s law dictionary defines front-running as A broker™s or analyst™s use of non public information to acquire securities or enter into options or future contracts for his or her own benefit, knowing that when the information becomes public, the price of the securities will change in a predictable manner.

Investopedia defines the term as The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients have been given the information.

The Law

Regulation 6(b) of the erstwhile regulation, SEBI (Prohibition of Fraudulent and Unfair Trade Practices to Securities Markets) Regulations, 1995 (1995 Regulation), stated that no person shall on his own behalf or on behalf of any person, knowingly buy, sell or otherwise deal in securities, pending the execution of any order of his client relating to the same security for purchase, sale or other dealings in respect of securities.

Regulation 4(2)(q) of the current SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (2003 Regulation) states Dealing in securities shall be deemed to be fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following namely : –
(q) an intermediary buying or selling securities in advance of a substantial client order or whereby a future or option position is taken about an impending transaction in the same or related future or options contract.

The Case Laws

The 2003 Regulation in a way clarified the applicability of the offence of front running. Securities Appellate Tribunal (SAT) in its detailed order dated 09.11.2012 in the matter of Dipak Patel vs. SEBI (Dipak Patel Order) held that the 1995 Regulation prohibited front-running by any (emphasis applied) person dealing in the securities market and a departure has been made in the 2003 Regulation whereby front running has been prohibited only by intermediaries. It was further held in the Dipak Patel Order that, in the absence of specific provision in the SEBI Act, rules or regulations prohibiting front running by a person other than an intermediary, the appellant, being a non – intermediary cannot be held guilty.

The Dipak Patel Order was soon followed by another order of SAT dated 07.09.2013 in the matter of Vibha Sharma & another vs. SEBI (Vibha Sharma Order) which involved a similar question of law. In the case of Vibha Sharma, SAT has given liberal interpretation to the concept of front running and held The Definition of front running, therefore, cannot be put in a straight-jacket formula. Further, in the said judgment, the Hon™ble SAT aptly held that the appellant is guilty under Regulation 3 and 4(1) of the 2003 Regulation.

Considering the definition of front-running, what needs to be considered is whether the charge of front-running can be foisted on a person / entity other than an intermediary. In my humble opinion, no.  It would be making a non – advocate liable for professional mis-conduct under the Advocate™s Act, 1961.

For a moment it is not suggested that any person taking advantage of unpublished price sensitive information is not breaching the law. The 2003 Regulations was never intended to imply non-intermediary taking advantage of unpublished price sensitive information.

The law is being breached. However, the applicable regulations are Regulation 3 and 4(1) of the 2003 Regulation (as held in the Vibha Sharma Order) and even perhaps Insider Trading Regulations.

Regulation 6(b) of the 1995 Regulation says that ˜no person™ shall deal in securities either on his own or on anyone else™s behalf, pending the execution of any order of ˜his client™. Only a broker / intermediary have clients for whom they execute orders and thus it can be said ˜no person™ in the 1995 Regulation implied broker / intermediary.

In view of the above, it can be accordingly concluded that front-running is a wrongful act committed by a broker or any other intermediary and are thus inter alia liable under regulation 4(2)(q) of the 2003 Regulation. Persons other than intermediary who take advantage of unpublished price sensitive information, amongst others, are in violation of Regulation 3, 4 of the 2003 Regulation and SEBI™s Insider Trading Regulation.

SEBI ought to ensure penalizing under the correct regulation / laws in order to avoid the wrong doer being let off on technical grounds.

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