If you know the index rules, it's fairly simple to calculate the turnover it is going to generate when it rebalances and subsequently the impact the rebalance is going to have on prices. This is a fairly well known behavior and a lot of players have been doing this for a long time. Basically every index of any significance is already being monitored and rebalancing effects are "front-run" this way.
I put the word in quotes, because this is a perfectly legitimate way of front running. The major indices are all public, and anyone can take a crack at this. In other words, if I announce to the world a month in advance that on a specific day and a very specific time of the day (at the closing auction) I'm going to buy X amount of specific stocks and sell Y amount in other stocks, I can't blame people for using that information against me.
Predict or react to index changes faster than the funds that are compelled to follow the index.
But you can't front run shares of mutual funds; they always trade at close of business at NAV.
You could potentially front run ETFs, but if you're worried about that, you can use limit orders and get the price you want or not transact. As long as you use a competent broker that offers limit orders.
> A form of front-running in index funds is common and isn't illegal.
> Index funds track a financial index by mirroring the index's portfolio. The composition of the index changes periodically to balance it accurately as the stocks that make it up change dramatically in price or as stocks are added or removed from the index. That forces the fund's managers to buy or sell some components of the index.
Then investopedia is wrong. Front running is a very specific thing, a) it requires private information, b) requires trading on behalf of someone and c) requires a fiduciary duty to the person
If we use that expansive definition of "front running", is it "front running" if I buy stocks trying to squeeze short sellers? What about if I thought people would buy/sell telsa stocks because of musk's role in the culture wars, and tried to get ahead of that? Is "front running" just buying low and selling high?
Well, let's not call a short squeeze by another name.
Otherwise, I wouldn't call those things front running, as there's no indication of imminent activity.
If a material increase in lending rates on a heavily shorted stock was announced, and you bought because you were pretty sure the shorts would be buying to close, that could be front running, yeah.
I dunno about market moves based on Elon's role in the culture wars, but maybe if he did something in particular.
In general, buy on the rumor, sell on the news could qualify as front running under this definition, but I think I'd want to narrow it a bit to working to trade ahead of perceived imminent and definite trades. Most of the illegal front running is trading ahead of specific trades in response to seeing those orders.
>Most of the illegal front running is trading ahead of specific trades in response to seeing those orders.
Any evidence this is actually happening, rather than something like "this ETF rebalances every quarter, they're unbalanced, and are expected to rebalance in this way", or "this company is probably going to get included in the S&P 500 because it's doing really well"? What makes this sort of "front running" less acceptable than buying because "I like the stock", or trading on technical analysis?
I put the word in quotes, because this is a perfectly legitimate way of front running. The major indices are all public, and anyone can take a crack at this. In other words, if I announce to the world a month in advance that on a specific day and a very specific time of the day (at the closing auction) I'm going to buy X amount of specific stocks and sell Y amount in other stocks, I can't blame people for using that information against me.