Shortly said, front-run orders are a serious problem that could bring many issues for investors. That is why, today, we are looking closely at what exactly front-run orders are in crypto, and how to avoid becoming a victim of them.
Front-Run orders: what are they?
If a trader takes advantage of an upcoming market order, before it’s executed, this is called a front-run order. It is called this way, as traders jump ahead of others in the queue to catch the trading opportunity.
Why is this a bad thing?
Well, the answer is simple. Those types of orders can manipulate the market, gaining an unfair advantage over other traders. The reason is that assets may trade at different prices than what they would have been if the order was executed normally.
Who can execute a front-run order?
A front-run order can be executed by a single trader, or an exchange, and the aim usually is to manipulate prices, and make a profit out of it.
Actually, those who can execute a front-run order, are those who have access to privileged information. For example, big exchanges or institutional investors, with insider knowledge.
Fraudulent activity is also a possibility, as some traders may use front-run orders to manipulate prices.
5 reasons why front-run orders are an issue
Manipulation of the price - When executed, a front-run order can create a fake demand and price movements, which, on the other side, can harm other traders, as they would have to trade on higher prices.
Unfair advantage - Front-run traders have an advantage over other traders, as they have access to information, unavailable for others.
Lower trust on the market - Front-run orders are usually leading to lower trust in the crypto market, because of the assumption that some traders have more information than others.
Volume manipulation - Front-run orders may also cause an artificial trading activity, leading to manipulated trading volume.
Fraudulent activity - There is a great possibility that exchanges, involved with front-run orders, may be engaging in fraudulent activity.
How to avoid being a victim of front-run orders?
Fortunately, it is not impossible to protect yourself from front-run orders, following a few steps:
Trading on secure exchanges - This is always a must. Make sure you are trading only on exchanges with strong security measures, to reduce the risk of any fraudulent activity.
Keep an eye on your position in the order book - If you notice some rapid changes, or your order is not in a good position, you may want to reconsider.
Payattention - Any suspicious activity on the exchange may be a sign to stay away from the market.
Use stop-limits - Stop-limit orders will help you reduce the risk. You can specify a maximum or a minimum price, for executing the order.
How to identify front-run orders?
One of the ways to protect yourself from front-run orders is to identify them, and for to achieve this you will need to look for certain signs in the order book, such as:
Large buy orders, in a short amount of time;
Large discrepancy between the bid and ask prices;
What can we expect in the future around regulations on the market?
There is a reason to believe that regulation around front-run orders will grow in the future. Regulators are becoming more and more aware of the potential risks, and we believe it is only a matter of time before an action is taken.
Of course, for all traders, it is important to ensure that trading operations are safe and secure. Crypto exchanges are constantly working on keeping the market fair and transparent, and we believe that it is possible to create a beneficial environment for traders.