Mumbai: As per the various media reports, Quant Mutual Fund has come under the radar of the market watchdog, the Securities and Exchange Board of India (Sebi), with scrutiny of front-running in their mutual fund schemes.
Further, the Quant Mutual Fund management confirmed the queries from the marker regulator and, in clarification, has urged mutual fund investors to be fully committed to cooperating with Sebi. Here is why mutual investors should be aware of what is front-running in mutual funds
Understanding front-running
Last May 2023, Sebi issued a consultation paper on an Institutional Mechanism for Asset Management Companies to deter possible market abuse and fraudulent transactions. The paper was approved this year to build a strong mechanism to prevent front-running and fraudulent transactions inside AMCs.
In simple terms, front-running refers to trading in a financial asset or in any particular stock with insights on future trading to exploit stock prices for profit. Under this form of market manipulation, a broker, dealer, or fund manager buys and sells stocks in advance for a substantial order in anticipation that when the price information becomes public, the price of such securities might change.
Front-running is an unfair and illegal practice because it helps intermediaries and fund managers trade for a higher profit, often at the expense of their clients.
How is front-running different from Insider trading?
Because front-running and insider trading are both unethical practices, they are frequently compared. However, these two practices differ. Trading securities based on significant non-public information about a company is known as insider trading. Insiders use privileged knowledge to make trades for personal benefit. They can be company executives, employees, or anyone with sensitive information access.
Front running, on the other hand, entails trading stocks in response to information about pending orders or projected market moves. It usually happens when a trader or broker prioritizes their trades over those of their clients or the public by abusing their position or advanced knowledge.
Why should investors know about front-running?
Front running can happen in the stock, commodities, and other financial markets, among other places and situations. Investors and other market players need to be aware of the dangers of front running, how it operates, and how it differs from insider trading.
Front-running can adversely impact investors, especially in the case of Quant mutual funds; if Sebi finds significant discrepancies, there can be redemption pressure, which will also affect the fund’s Net Asset Value (NAV). That said, Sebi recently approved various amendments to improve the management of AMCs’ accountability and responsibility regarding front-running, this will act as an catalyst to protect investors in the future.
Front Running is considered an unethical practice because it allows the broker or dealer to benefit at the expense of their clients. Here is what investors should be aware of about front-running. Business Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
