What is Tailgating?
Tailgating occurs when a broker buys or sells a security after doing the same for a client.
How Does Tailgating Work?
Let's say John Doe is a broker for Jane Smith. Jane calls John and tells him she just saw a press release that Company XYZ is bringing in a new hot-shot CEO. She tells him to buy 5,000 shares of Company XYZ for her account. John executes the trade for Jane and then tailgates by buying another 5,000 shares for himself because he has been watching Company XYZ and agrees with Jane that the CEO change should be a good thing for the stockholders.
In some cases, brokers tailgate when the client's order is so large that its execution will affect the price of the security.
Why Does Tailgating Matter?
Tailgating is not the same as frontrunning. In frontrunning, the broker executes the trade for his own account before executing the client's trade. In tailgating, the broker executes the trade for his own account after executing the client's trade. Frontrunning is illegal; tailgating is just in poor taste for many reasons, not the least of which is that the broker's job is to make money for his clients and know more than they do.