Front-running

Front-running means trading with advance knowledge of a large upcoming order. Someone places their own order first to potentially gain an advantage.

What is front-running?

An order is an instruction to buy or sell crypto. In front-running, someone knows a large order is coming and trades first.

That person may profit from a potential price move caused by the large order. In crypto, bots and algorithms sometimes do this by detecting large, unprocessed orders.

An example of front-running

Suppose a broker knows that a client wants to buy a lot of Bitcoin. The broker buys Bitcoin first, before the client's order is filled.

If the large purchase potentially pushes the price up, the broker can then sell at a profit. As a result, the client may pay a higher price than they would have without this action.

Why does front-running matter in crypto?

Front-running is unfair because someone uses advance knowledge at another person's expense. It can lead to worse prices for clients and harm trust in a trading platform.

In regulated financial markets, front-running is prohibited. The rules are not always the same in crypto markets. That's why some crypto platforms try to limit it through technical measures, such as changing the order in which transactions are processed.

You may also come across the term in DeFi and MEV. In DeFi, MEV is the term often used for gaining an advantage from the order of transactions. This doesn't automatically mean that a price will rise or fall, but it does mean that a transaction may be negatively affected.