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Tailgating in finance refers to the practice of executing the purchase or sale of a security on behalf of a client and then executing the same action on one’s own behalf. It is not illegal but is considered unethical by many brokers. It should not be confused with insider trading, which is illegal.
While most people think of tailgating as an activity that takes place on the highway or in sports arena parking lots, the term can also apply to a specific type of activity that takes place with inversions. As far as finance is concerned, tracking refers to the practice of executing the purchase or sale of a security on behalf of a client, and then executing the same action involving the same actions on one’s own behalf. While this type of monitoring is generally associated with brokers, the fact remains that anyone acting as an investor 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 follow the lead of a client. There is no illegal access to proprietary information related to tracking. By contrast, insider trading involves acquiring information that is not considered to be in the public domain and attempting to profit from that information before it becomes public knowledge. In many countries, insider training and a similar strategy known as a front run are considered illegal and are subject to heavy fines and, in many cases, criminal charges.
While tracking is not illegal, many brokers and other financial professionals consider the practice unethical. Brokers would reasonably be expected to make investments based on the results of their own research and assessment of current market conditions, so any type of investment transaction based on an order placed by a client could be considered suspicious. For this reason, many brokers choose to refrain from replicating client orders with their own investment accounts, unless the order is based on recommendations provided to the client by the broker in the first place.
The general rule of thumb with regard to following through is that choosing to follow a client’s lead and make an investment without researching the relevant factors may carry a degree of risk that is not much different from choosing to make an investment based on gut instinct alone. In short, most brokers will find it wiser to research the investment strategy personally and come to their own opinion rather than simply following a client’s lead.
SmartAsset.
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