In 2018, the World Economic Forum released data that highlighted fraud and financial crime as a trillion-dollar industry. Watch the presentation or read the blog to know more at https://bit.ly/3KyfAxF

1. BLog By Iftach Drori:- THE DETECTION SERIES
Front Running: using technology to
stay one step ahead

2. Introduction
In 2018, the World Economic Forum
released data that highlighted fraud and
financial crime as a trillion-dollar industry.
Two years later, analysts are citing $3.5
Trillion as the current cost of financial
crimes. Throughout the history of market
fraud, corrupt actors have made history by
finding loopholes to exploit so that they can
amass great wealth, illicitly acquired through
market abuses such as front running,
spoofing, layering, insider trading, and more.

3. How does front running work?
Front running is an illegal form of market
manipulation. The fraud is enabled via insider
trading and is prosecuted on the grounds of
affording the perpetrator with “an unfair
advantage".
1) a client initiates a large stock
purchase request.
2) the broker transacting the purchase executes
his/her own order (“front running” the client)
3) the broker then executes the
client’s purchase.
4) the stock price goes up.
5) the broker profits from the sale of
his/her stock purchase.

4. Smartphones are a problem
With dozens of providers now offering “burner phones,”
which provide the user with a temporary, unidentifiable
number that cannot be traced back to the owner, front
running is becoming even more difficult to track. A
quick call or text exchange on WhatsApp with a burner
phone circumvents surveilled communications and
enables the exchange of critical information to enable a
front-running crime – without the risk of being caught.
Comparatively, in-house communication systems aren’t
wholly effective either. Bloated, proprietary in-house
communication solutions have high rates of
dissatisfaction and low rates of adoption. For the most
part, the technology is available. However, it just can’t be
applied ubiquitously and automatically. At least not yet.

5. Technology is only part of the solution
Sending a “stock tip” is surprisingly easy to do, despite increased surveillance and advanced
technologies. Police and regulatory agencies are increasingly using technology to monitor
civilians as well as commercial brokers, but citizen watchdog efforts and ethics boards are
challenging broad access. Apple is notoriously upheld as a champion of privacy, even if the
mobile phone holder is accused, or convicted of heinous acts of terrorism and other crimes. .
Identify theft and crypto-mining are, perhaps, the most notable examples of technology-
enabled financial crimes. However, front running, which is a common form of insider
trading, will be the theme of the examples featured here.

6. Recent cases of front running
In 2013, Daniel Bergin, a trader at Cushing MLP Asset Management, was using his wife’s
accounts to shield his front running of hundreds of trades. His illicit profits reportedly
topped $1.7 Million. In 2011, Mark Johnson was HSBC’s former global head of foreign-
exchange cash trading. He abused his position to create more than $7.3 Million in profits
for the bank by front running a large trade issued by one of the bank’s clients. And may
other financial frauds was happend.

7. The fox is guarding the henhouse
There’s a bit of a conundrum within the field
of market abuse surveillance and how front
running is monitored. Financial institutions
require that brokers sign contracts which
stipulate their conversations will be monitored
but employers are challenged to tightly define
and walk the delicate line between proactive
monitoring and privacy, particularly when it
comes to eComms. Employers are also
required to show “substantial evidence” to
indicate probable cause before a forensic audit
to be approved but in order to do so, they run
the risk of violating personal privacy for which
they are liable.

8. Conclusion
This issue is particularly acute within the
niche of eComms as new modalities are now
appearing regularly while regulations, market
fraud monitoring systems’ technology and
company policies are lagging behind these
innovations. And, it becomes a matter of how
current the technology is regarding the
likelihood of detecting, reporting and
successfully prosecuting the front runners.

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