Resources
Case Studies
Profit gaining through front running
Ken is working for an international futures trading company as a dealing manager. His company often receives orders from fund managers whose moves can significantly affect the market. Taking this opportunity, Ken makes some secret arrangements with Anna, a dealer of another futures trading company, that whenever Ken receives "purchase" orders from his company, he will call Anna immediately to advise her to buy contracts. After Anna has completed her order, Ken executes his company’s orders. Since his company’s orders are usually in bulk, the price of the futures contract is driven up within a short time interval. Anna then sells the contracts and shares the profit with Ken. Similar arrangements are made when Ken receives "sell" orders from the company.
Case Analysis
Ken should clearly know that the orders of his company’s clients are non-public information which will have a substantial effect on the trend of the futures market. However, he still deliberately delays effecting transactions for clients and conspires with Anna to make use of this market-sensitive information for personal gain. Both of them have engaged in front running and thus violate the *Codes of Conduct.
Ken and Anna may be guilty of a corruption offence too. Under Section 9 of the Prevention of Bribery Ordinance (POBO), Ken's sharing of the profit from the front running operation can be treated as accepting an advantage from Anna as a reward for his doing an act in relation to his principal’s affairs, i.e. passing the information of his company orders to Anna.
*Remarks: Codes of Conduct refer to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, the Code of Conduct for Corporate Finance Adviser and the Fund Manager Code of Conduct.