Jury Verdict Blurs Line Between Front-Running And Pre-Hedging

On October 23, 2017, a Brooklyn federal jury found Mark Johnson, a foreign exchange trader, guilty of fraud for trading ahead of a $3.5 billion client order.¹ The verdict is a clear warning to foreign exchange traders that trading ahead of a client order, even for hedging purposes, can qualify as front-running and can result in criminal liability.

Traders oftentimes anticipatorily trade ahead of a pending transaction. One such strategy, pre hedging, is a common practice where a person takes a hedge position in anticipation of a future transaction. In contrast, front-running is a practice where a trader enters into a transaction to benefit from non-public information about a large, pending transaction that will impact the market price of a commodity or security. While the former practice is perfectly legal, the latter runs afoul of a broad swath of federal laws and regulations.