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Pre-hedging versus front-running: six of one, and half a dozen of the other?
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Institutions which provide market liquidity, such as banks, are in possession of very valuable confidential client data – their trading intentions. Trading intentions can generate revenue for the bank with little or no risk. This requires the bank to trade for its own account using the client’s confidential information before it trades for the client. This behaviour is generally given two labels: “front-running”, which is considered to be illegitimate, and “trading-ahead”, which is thought to be legitimate. However, their effects are often identical which should imply that their legitimacy should also be the same.
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