Frontrunning: How Transactions Are Manipulated Before They Are Confirmed

Introduction

In decentralized finance networks, frontrunning is a growing problem that affects traders daily. Unlike traditional exchanges where regulations and oversight can prevent this practice, the transparency of the blockchain creates new opportunities for manipulation. This text explores what frontrunning means, how it operates on modern trading platforms, and what strategies can protect investors.

What Is Front Running About?

Frontrunning is a trading practice where someone acts on information about an impending large transaction before it is executed. The practice is based on an actor with access to this knowledge placing their own trades before the target transaction is completed, with the aim of benefiting from the market movements that the larger transaction will cause.

This form of market abuse constitutes a breach of trust and integrity as it exploits insider information for personal gain at the expense of others. In traditional financial markets, brokers or traders with access to customer orders can take advantage of this. In the world of blockchain, the problem is more systemic – transactions are visible before confirmation, making frontrunning a widespread danger.

The Mechanics Behind Frontrunning

To understand this practice, we must break down the process into steps.

Access to Important Information

Everything starts with someone becoming aware of a large upcoming transaction. In traditional banking, this could be a customer broker who knows about an institutional order's impending execution. In decentralized exchanges, the situation is different – the transactions are simply visible to everyone before they are processed by the network.

Placement of Seller Transaction

Those who attempt to perform frontrunning buy or sell the same asset for their own account before the target transaction goes through. A classic situation: if a large buyer is about to purchase millions of tokens of an asset, a robot trader can buy up the same assets at the current price in anticipation that the buy order will drive up the price.

Profit Taking

When the original transaction has been executed and the market reacts as expected, frontrunning closes its position with a profit. This sequence often occurs within seconds or minutes.

Practical Examples From Traditional Markets

An institutional investor is planning to buy one million shares in a company. The investor transmits this order to their broker. The broker, knowing that this purchase will put upward pressure on the stock price, buys 10,000 shares for themselves before the client's order is executed. After the client's large purchase is completed and the price rises as expected, the broker sells their 10,000 shares at a higher value and realizes a quick profit.

Why Is Frontrunning Legally Prohibited?

Authorities around the world consider frontrunning a serious violation of market ethics for several reasons:

Abuse of Confidential Information: Financial experts are trusted to prioritize their clients' interests. Using confidential information for personal gain violates this fundamental relationship.

Market Justice Distortion: Those with access to privileged information gain an unfair competitive advantage that other market participants cannot counter.

Economic damage to investors: Traders and other market participants suffer financial losses due to price manipulation caused by this practice.

The supervisory authority therefore applies strict penalties for this behavior.

Frontrunning in Different Markets

Stock trading

In this sector, frontrunning is a long-standing issue. Brokers can exploit knowledge of large buy or sell orders to make their own trades before the order goes through.

Commodities And Currency Markets

Traders who operate with oil, gold, or various currency pairs can engage in frontrunning if they gain access to information about pending large transactions.

Blockchains And Decentralized Exchanges

This area has become an epicenter for frontrunning issues. Since transactions are completely transparent before confirmation, and protocols lack centralized control, frontrunning becomes much easier to execute.

Frontrunning In The Decentralized Finance World

How It Works On DEX And AMM

Decentralized exchanges and automated market makers use smart contracts to process trades. Transactions become visible on the blockchain before they are finalized, creating a perfect environment for frontrunning.

On networks like Ethereum, Solana, and BNB Chain, traders and bots monitor the transaction pool (mempool) for large pending orders. As soon as a large transaction is detected, a bot trader can:

1. Send a custom transaction with higher priority ( by paying high gas fees on Ethereum and BNB Chain, or priority fees on Solana).
2. Ensure that this transaction is processed before the painting deal
3. Take advantage of the price movements caused by the paint shop

If a large buyer is about to purchase a large amount of a token, frontrunning buys first at the current price. When the large purchase drives up the price, frontrunning sells its holdings for a profit.

Low Liquidity Pools as Goal Creators

Traders operating in markets with limited liquidity are exposed to particular risk. Many set high deviation settings (slippage tolerance) to ensure that their transactions are completed.

Here is a scenario: Bob wants to buy a low liquidity meme coin on a platform like Uniswap, PancakeSwap, or Raydium. He sets a slippage of 20 percent to ensure that the trade is executed. A bot detects this large order, pays high fees to buy up existing liquidity first, and sells this token to Bob at a much higher price. Because Bob's slippage setting allows this, he ends up paying far more than he originally expected – all without realizing he has been frontrun.

MEV-Exploitation on Fast Networks

Maximum extractable value (MEV) is a concept that describes the profits that validators and bots can make by manipulating the transaction order in a block. On Solana, this is a particular problem because the network allows both high priority fees and validators' direct access to transaction data.

When a large buy or sell order is detected, an MEV bot can quickly place its own order to take advantage of the anticipated price movement. Developers are working on solutions such as private transaction pools and fair ordering mechanisms, but MEV-driven frontrunning remains an ongoing challenge even on high-performance blockchains.

Strategies to Avoid Frontrunning

Traders operating on decentralized platforms can take several measures to reduce risk:

Reduce Deviation Tolerance: The lower this setting, the less room frontrunning bots have to manipulate the price. A deviation of 0.5-1 percent is safer than 10-20 percent.

Use Private Transaction Paths: Some services offer the ability to hide transactions from the public until they are confirmed, preventing bots from seeing them in advance.

Split Large Transactions: Instead of a single large purchase, this is divided into several smaller transactions spread over time, which reduces attention and attraction for frontrunning bots.

Use MEV Protection Tools: Services and protocols that offer MEV protection can redirect or neutralize attempts at frontrunning by reducing the rewards for this activity.

By combining these strategies, traders can significantly reduce their frontrunning exposure.

Concluding Thoughts

Frontrunning represents a fundamental problem for the fairness and integrity of markets. In traditional exchanges, this practice is regulated by laws and oversight. In the decentralized finance world, the problem requires innovative technical solutions.

By understanding the mechanics behind frontrunning and applying defensive strategies, traders can better protect their investments. Meanwhile, developers are working at the protocol level to make frontrunning less profitable and harder to execute, gradually creating a more transparent and fair trading environment for everyone.