Front-running of Client Transactions

Front-running is a malpractice which arises when a person misuses confidential information about another person's trading intentions to make a profit, often at the latter's expense. For example, a broker who knows the client is going to buy a lot of shares in a stock may buy up that stock first at a lower price to sell on to the client at a higher price. If the broker is acting as a portfolio manager of discretionary clients, then the front-running problem would become more serious.

SFC recently revoked the licences of Mr Chung Yu Kit and Mr Ding Lai Leung for front-running. A

t the material time, Chung was accredited to J.P. Morgan Broking (Hong Kong) Ltd.

SFC found that:

• Chung gave confidential information about his clients' instructions to buy four listed securities to fellow trader, Ding, before placing those clients' orders;
• Ding bought shares in the four listed securities on five occasions between Sept 2006 and Oct 2006;
• Ding sold the shares for profit and, in the vast majority (94%) of selling transactions, he sold the shares to Chung's clients;
• Chung's clients ended up paying more for the shares than they would have otherwise; and
• Ding reaped a profit before transaction costs of approximately $128,000.

Ding was therefore fined $128,000, being the amount of profit made from his front-running activities. It appears that Chung got no benefit by giving the information of client orders to Ding, then why did he do so?