Understanding Front Running: How to Protect Your Investments in Cryptocurrency

The Essentials of Front Running

What you need to know:

• Front running occurs when someone executes trades based on insider information, anticipating a large volume transaction.
• In public blockchain networks, this practice is particularly common in decentralized protocols and automated trading platforms.
• There are practical strategies that operators can adopt to significantly reduce exposure risk.

Front Running: Origin and Fundamental Concept

Front running is a practice that has become synonymous with market manipulation in traditional financial environments. It manifests when intermediaries or market professionals exploit non-public information about future transactions to gain personal profits. This type of behavior undermines institutional trust and affects the entire integrity of the trading ecosystem.

The root of the problem lies in informational asymmetry: someone with prior knowledge of a large buy or sell order can position themselves strategically before that movement actually occurs. When the original transaction happens, the market reacts as expected, allowing the exploiter to profit quickly.

How the Mechanism Works in Practice

Step 1: Access to Privileged Information

For front running to occur, it is necessary for someone in a position of authority to have prior knowledge of an important movement. A market intermediary may have visibility over client orders before official execution. Institutional investors occasionally need to process large transactions that, by their nature, impact prices.

Step 2: Early Positioning

Knowing that a large order will arrive soon, the front runner executes his own operation on the same asset. If the expected order is a large buy, the front runner acquires units at the current price. If it is a sell, he shorts or liquidates positions.

Step 3: Movement Capitalization

After the execution of the client's original order, the market moves as expected. The price rises ( in case of a large buy ) or falls ( in case of a large sell ). At this moment, the trader exits their position with profit.

Practical illustrative example: An investment fund decides to buy 500 thousand shares of a company. Its order goes through an intermediary who, knowing the impact of this purchase, acquires 50 thousand shares for himself. When the fund's order is executed, the price rises by 3%. The intermediary sells his units with an immediate gain of tens of thousands.

Why Front Running is Considered Criminal

Financial regulators around the globe have criminalized this practice for well-defined reasons:

1. Breach of Fiduciary Trust Intermediaries and market professionals have a legal obligation to prioritize the interests of clients. Using insider information for personal benefit constitutes a serious breach of that trust.

2. Destruction of Market Integrity When some participants gain informational advantages, the market ceases to be fair. This discourages legitimate investors and harms the organic formation of prices.

3. Direct Financial Losses Clients and operators who do not have access to privileged information suffer a significant disadvantage. Their gains are systematically transferred to the exploiters.

Regulatory institutions in various countries impose severe fines and may impose professional restrictions against offenders.

Different Contexts of Occurrence

Stock Exchanges

In stock markets, brokers can exploit information about large unexecuted orders. It is one of the most historically documented scenarios.

Commodity and Foreign Exchange Markets

Commodity and forex traders face similar risks when intermediaries have visibility into future operations.

Decentralized Cryptocurrency Environments

The digital asset sector faces unique challenges related to front running, especially in protocols where transactions are visible before final confirmation.

Front Running in Blockchain Networks: Specific Dynamics

How It Happens in Decentralized Environments

In decentralized trading platforms and decentralized finance protocols (DeFi), front running takes on distinct dimensions:

Visibility of Pending Transactions Public networks like Ethereum, Solana, and BNB Chain display transactions in mempool before confirmation. This means that bots and operators can monitor the network in real-time looking for imminent large movements. Anyone connected to the network can see these transactions before they are included in a block.

Priority Fee Strategy In Ethereum and BNB Chain, operators can pay higher gas fees to process their transactions first. This ensures that their operation is included in the block before the target transaction. In Solana, the mechanism works through prioritization fees and privileged access for certain validators.

Execution and Profit A robot detects a large pending token purchase. It buys the same amount at the current price using a high rate. Its transaction is confirmed first. When the original order is finally executed, the price rises. The robot resells for immediate profit.

High Slippage Tolerance Exploration

Slippage is the price variation that a trader accepts to ensure that their transaction is completed. In markets with low liquidity, a high tolerance for slippage creates perfect opportunities for exploiters.

Real scenario: An operator wants to buy a new/obscure coin on a decentralized platform. To ensure that his order is executed, he sets a 50% slippage tolerance. A bot detects this, buys all the available liquidity beforehand, and sells it back to the operator at a much higher price. Since the tolerance allows for this variation, the transaction goes through, but the operator pays significantly more than expected.

The larger the order volume and the tolerance for slippage, the greater the window of opportunity for this exploitation.

Maximum Extractable Value (MEV) and Solana

The concept of MEV refers to the profits that validators or bots can obtain by manipulating the order of transaction confirmations. Solana, despite its speed, is not immune.

In Solana, MEV occurs because:

• Transactions are visible before being finalized
• Operators can use prioritization fees to position their operations ahead.
• Validators have privileged information about the order of transactions

When a large order is detected, an MEV bot quickly sends its own order to take advantage of the expected price change. Although Solana's speed reduces some risks, MEV remains a structural challenge.

Developers are working on solutions such as private mempools, fair ordering systems, and MEV auctions that distribute profits more equitably.

Defense: Practical Protection Strategies

For cryptocurrency operators, there are concrete measures:

Reduce Slippage Tolerance Set a necessary minimum tolerance. This drastically reduces the margin that explorers can extract. A tolerance of 1-2% in liquid markets is sufficient in most cases.

Use Private Transactions Some platforms offer private transaction pools where your orders are not visible to malicious bots. This conceals your intentions until confirmation.

Split Large Operations Instead of making a large purchase all at once, break it down into multiple smaller transactions. This reduces the signal that bots can detect.

MEV Protection Tools There are blockers and protocols that distribute value extraction more fairly. These systems significantly increase operational security.

Choose Markets with Adequate Liquidity Trading in pairs with sufficient volume reduces the impact of your transactions and makes front running less profitable.

Final Reflection

Front running remains a threat in both traditional markets and decentralized cryptocurrency networks. Its existence questions the fairness and transparency of trading environments.

As regulators tighten penalties in the traditional financial market, decentralization creates unique challenges. However, understanding the mechanisms and adopting the available defenses allows operators to protect their investments more effectively.

The security of your transactions depends on both knowledge and appropriate tools. By educating themselves about these practices and implementing preventive measures, traders can significantly reduce their exposure to exploitation.

Complementary Reading

To deepen your knowledge about security in decentralized trading, consult resources on bid-ask difference, liquidity mechanisms in automated protocols, and privacy protection technologies in blockchain.