Jun 6, 2011
Q&A
What is the relation, if any, between the practice of "front running" trades and the efficient market hypothesis?

EFF/KRF: First, if front running is profitable, there must be information in the trade that is not already in market prices. Thus, security markets must not be perfectly efficient. Second, if front running speeds up the rate at which a specific piece of information is brought into the market, we might even say it improves market efficiency. More generally, however, we have to consider how front running affects those who are gathering information and trading on it. If the threat of front running reduces their incentive to collect information, front running makes markets less efficient.

 
ABOUT FAMA AND FRENCH
Eugene F. Fama
The Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business
Kenneth R. French
The Roth Family Distinguished Professor of Finance at the Tuck School of Business at Dartmouth College
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Eugene Fama and Ken French are members of the Board of Directors for and provide consulting services to Dimensional Fund Advisors LP.