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Both front running and trading ahead are violations. Both are based on trading using advanced knowledge and the violations are often confused as a result. Front running is the entering of an order for the account of an agent or firm prior to the entering of a large customer order. For example, let's say that a representative received an order from an institutional investor to purchase 500,000 shares of DEF. Prior to entering the order to purchase the large amount of stock, the representative enters an order to purchase 1,000 shares of DEF. for themselves.. After purchasing the share for their own account the representative enters the order to buy 500,000 shares of DEF for the institutional customer. This large order drives the stock price up and the rep sells their shares at a profit.
Trading ahead is the entering of an order for a security based on the prior knowledge of a soon to be released research report. Research reports can have a substantial impact on the price of the stock covered in the report. This is particularly true when the analyst has a large following. It is not uncommon for the price of a stock to move up or down by 10 percent or more on the day the report is released. Questions on the exam often provide scenarios where a rep walks into an elevator and overhears a conversation between two analysts about a report they are going to release with a price target on a stock significantly higher than its current market price. The rep then returns to his or her desk and buys the stock for clients and themselves.. This is a classic example of trading ahead.