Tailgating in finance refers to executing the same purchase or sale of a security for a client and oneself. It is not illegal but considered unethical by many brokers. It should not be confused with insider trading, which is illegal. Following a client’s lead without researching relevant factors involves risk.
While most people think of tailgating as an activity that takes place on the highway or in sports stadium parking lots, the term can also be applied to a specific type of business that takes place with investments. In regards to finance, tailgating refers to the practice of executing the purchase or sale of a security on behalf of a customer, then performing the same action involving the same security on your own behalf. While tailgating of this type is usually associated with brokers, the fact is that anyone acting as an investment agent for a client can engage in this type of activity.
Tailgating should not be confused with the illegal practice of insider trading. With tailgating, the broker or brokers are following a client’s lead. There is no illegal access to proprietary information involved in tailgating. Conversely, insider trading involves acquiring information that is not considered to be in the public domain and attempting to take advantage of that information before it enters the public domain. In many countries insider training and a similar strategy known as front running are considered illegal and are subject to heavy fines and in many cases criminal charges.
While tailgating is not considered illegal, many brokers and other financial professionals consider the practice unethical. One would reasonably expect brokers to make investments based on the results of their own research and assessment of current market conditions, making any type of investment transaction based on an order issued by a client suspicious. For this reason, many brokers choose to refrain from replicating client orders with their own investment accounts, unless the order was based on recommendations provided to the client by the broker in the first place.
The general rule regarding tailgating is that choosing to follow a client’s lead and making an investment without researching relevant factors can involve a degree of risk that is no different than choosing to make an investment based on gut feeling alone. In short, most brokers will consider it more prudent to research investment strategy themselves and come to their own opinion than to simply follow a client’s lead.
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