Front Running

An adviser trades ahead of a large client order for its own benefit. This is:

1. A.Allowed for the adviserAn adviser has no privileged right to act on knowledge of its client's pending order. That knowledge belongs to the client relationship; using it for the firm's own account is the misuse the prohibition exists to stop.
2. B.Front running, which is prohibitedCorrect - front running is barred.
3. C.Best executionBest execution is a duty owed to the client to seek the most favorable terms reasonably available for the client's order. Trading first for the firm's own account tends to move the price against the client, which is the opposite of pursuing the client's best terms.
4. D.Efficient executionEfficiency here would mean getting the client's order done well, not getting the adviser's order done first. Sequencing the firm ahead of the client is a self-dealing choice dressed up in operational language.

Why: Front running - trading ahead of a client's order - is a prohibited practice.

Front running is best defined as:

1. A.Executing a customer order at a price better than the prevailing marketWrong. Price improvement is a benefit to the customer, not a violation.
2. B.Trading for one's own benefit ahead of a known customer or firm block order likely to move the priceCorrect. The abused advantage is knowledge of the pending order.
3. C.Trading while in possession of material nonpublic information about an issuerWrong. That is insider trading. The information there concerns the company, not the order flow.
4. D.Placing a customer order ahead of the firm's own proprietary orderWrong. This is backwards; giving the customer priority is precisely what the rules require.

Why: Front running is trading for one's own account, or for an account in which one has an interest, ahead of a customer's or the firm's block order that is likely to move the price, in order to profit from the anticipated move.

An agent delays executing a client's order to trade ahead for personal benefit. This is:

1. A.A prohibited practice (front running)Correct - front running is barred.
2. B.Allowed for small ordersOrder size does not change whose interest comes first. A small order still belongs to a client entitled to prompt handling, and an agent who steps in front of it has used the client's instruction as information for his own trade.
3. C.Standard queuingOrders do queue, which makes this sound procedural. A legitimate queue is ordered by when instructions arrive, and this one has been rearranged by the very person holding the client's order so that his own trade goes first. That is not queuing but jumping the line using the client's information.
4. D.Required best executionBest execution requires handling the client's order promptly and seeking the most favorable terms reasonably available. Holding it back so the agent can trade first breaches that duty, and the delay itself can leave the client with a worse price.

Why: Trading ahead of a client's order (front running) is a prohibited practice.

An agent trades ahead of a client's block order for personal gain. This is:

1. A.Best executionBest execution is a duty owed to the customer about the quality of the customer's fill. Here the agent used knowledge of that order to trade for himself first, which is the opposite of serving the client.
2. B.Prohibited front runningCorrect - front running is barred.
3. C.Efficient executionNothing about this improves efficiency for anyone but the agent. Getting in ahead of a large client order tends to move the price against that client, harming the very person the agent represents.
4. D.Allowed for the agentAgents are permitted to have personal accounts, which is the grain of truth here. What they may not do is exploit advance knowledge of a client's pending order, because the client's interests come ahead of the agent's own trading.

Why: Front running is a prohibited practice.