Do we front run our subscribers?
As our readership has grown, we’ve noticed something that used to be rare is now becoming more common. Our research can move stock prices, sometimes substantially. This tends to happen with companies under $300 million in market cap, where liquidity is thinner and investor attention more limited. In some ways, that’s great. It means our work is helping drive investment decisions. But it also brings up a topic we take seriously—front running.
What is front running?
Front running refers to the act of getting ahead of someone else’s trade, typically a client’s, in order to profit from the price move you know is coming. For example, a portfolio manager who buys ticker XYZ in their personal account just before placing a large client order is engaging in classic front running. It’s illegal, and for good reason. It’s a clear violation of fiduciary duty. Every legitimate investment firm has systems in place to detect and prevent this behavior. At our previous firms, compliance teams closely recorded and monitored all trade activity, and any unusual behavior was quickly flagged. Regulators like FINRA or the SEC can audit this data at any time. It’s taken very seriously.
That’s why block trading exists. When you’re managing multiple accounts for clients, employees, partners, or yourself, you determine the full size of the intended trade first, execute it as one block, and allocate everyone the same execution price. It’s clean and fair. Some firms choose to trade account by account instead, but in those cases the order must be randomized or follow a rules-based process to avoid bias. As long as the method is unbiased, it’s both ethical and legal.
These rules apply to firms managing external capital. If you're trading on behalf of others, trading ahead for personal gain is a regulatory line that’s black and white. But what happens when you're not managing other people’s money, and your communication still influences markets?
Ethics vs. Legality
What happens when a research firm, investment manager, or podcast guest takes a position and then talks about it publicly, and the stock moves as a result? It raises a core ethical question. Is it okay to take a position and then talk about it publicly?
The answer: it depends on intent.
If the goal is to share a real thesis, grounded in research, because you believe in the opportunity and want to explain your thinking — of course that’s ethical. That’s no different than Warren Buffett going on CNBC and explaining why he owns Apple. Every serious investor does this. It’s protected speech, and more importantly, it adds value to the market. Undervalued companies deserve better price discovery. This improves capital allocation, helps firms raise money, and can enhance outcomes for employees and management.
It becomes problematic when the intent is to pump. If someone takes a position and uses their platform to drive artificial demand, aiming to flip the position into the price spike they create, that’s clearly unethical. It should be illegal. The challenge is that legally, intent is very hard to prove. Someone could publish a report, the stock jumps, and they sell the next day. They might claim they hit a price target, wanted to reduce risk, or simply changed their mind. Sometimes, that’s valid.
This is why short sellers in particular attract scrutiny. Some of the best-known short shops, like Citron, Muddy Waters, and Hindenburg, publish detailed reports that can send a stock down 50 percent or more in a single day. They usually establish their short beforehand and often begin covering almost immediately after the release, buying into the very selling panic their report created. (Read about an ongoing investigation into Citron here). Their defense is straightforward: taking profits & risk management. But readers can decide for themselves whether that’s a sufficient explanation. What’s clear is that this model, in the wrong hands, can be abused — and often is. We’ve been on the receiving end of it more than once. (You can read about one case here, where a former core position of ours dropped 60% in a single day following a two-part, 100+ page short report published by Gotham Research.)
So where does Pernas Research fit into all this?
We don’t manage client capital. We’re not regulated investment advisors. But we do invest personally in the companies we write about, and we are legally permitted to buy before we publish and even to sell afterward. Still, we want to be very clear: we never take positions with the goal of selling into short-term price moves that may result from our own research. That’s not what we’re doing, and it never will be.
As a general rule, we don’t trade around a name immediately after publication, regardless of price action. Whether you define that window as one day, three days, or five days, our stance is the same. It would be extremely rare for us to take action during that period. If we ever do, it will be because of a corporate event or new material information that emerges after publication. In that case, we will clearly explain why.
Why take such a strict approach, even though doing otherwise is technically legal? Because we believe the alternative is unethical. But beyond that, we think it’s just bad business. What’s profitable in the short term often comes at the expense of long-term trust. We’re building Pernas Research for the next 20 years and we believe strongly in the principle “the rot begins with the small things.” Tolerating a little unethical behavior today opens the door for incrementally worse tomorrow.
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Past performance is not necessarily indicative of future results. All investments carry significant risk, and it’s important to note that we are not in the business of providing investment advice. All investment decisions of an individual remain the specific responsibility of that individual. There is no guarantee that our research, analysis, …