Stock broker fraud is, thankfully, one of the forms of fraud that has decreased as stock markets have become more regulated. However, that doesn’t mean it doesn’t happen. The days of a stockbroker taking the old physical paper securities or deposited cash and running away are long gone. Stockbrokers who wish to do wrong by the clients today now have to resort to more shady methods.
One of the most prevalent (and, sometimes legal) forms of stockbroker fraud is an activity known as ‘front-running.’ Let’s say you were to call your brokerage firm and you wanted to buy 100 shares of XYZ. Your broker, knowing that this would likely move the market, instead places an order himself before executing your order. The broker essentially enters the market early, for himself, before completing your order and allows your order to drive up the value of his earlier entry.
The major problem with front-running is it is nearly impossible to detect. With the amount of high-frequency-trading (HFT) that occurs every second, front-running is a type of fraud that only diligent and active regulators can determine. There are other tactics that stockbrokers will employ that are not necessarily fraudulent but unethical. Some types of behavior are encouraging high-frequency day trading by new investors, undisclosed appropriation of dividends, and unclear rules or fees associated with shorting.