The name “front-running” came from when a broker needs to deliver the clients’ orders to the trading desk physically. The term vividly describes how it works - an attacker who knows a large order could run ahead to execute a trade before the client’s order goes through. What is the incentive for someone to do that? Here is an example that explains why. Suppose a broker receives a large order from a client, say, buy 500,000 shares of a company’s stock. The order is big enough to drive up the share’s price. Knowing this information, an attacker can place his small order, say 10,000 shares of the same stock, before the large order. The attacker can sell his shares at a higher price when the price goes up after the large order went through. The formal definition of front-running is a practice of benefiting from the advanced knowledge of pending transactions. Although benefiting some entities involved, this practice puts others at a significant financial disadvantage, making this behavior illegal in traditional markets with established securities regulations.
