Abstract
We investigate the level and determinants of front-running in an experimental asset market game. Participants receive perfect signals about future order-flow that can be exploited to manipulate prices and generate profits. We quantify the changes in front-running activity as we vary the direction, concentration, and noise level of the scheduled order flow. Front-running activity increases with larger, more concentrated, or buy-side anticipated future orders and decreases with noise. Our findings suggest that the inclusion of a large stock in an index should be done in multiple stages to reduce the trading cost of passive investors tracking the index.
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