In Finance, what is Tailgating?

While most people think of tailgating as an activity that either takes place on the highway or in the parking lots of sports stadiums, the term can also apply to a specific type of activity that takes place with investments. As it relates to finance, tailgating refers to the practice of executing the purchase or sale of a security on behalf of a client, then executing the same action involving the same stock on one’s own behalf. While tailgating of this type is generally associated with brokers, the fact is that anyone who acts as an investing agent for a client can engage in this type of activity.

Tailgating is not to be confused with the illegal practice of insider trading. With tailgating, the broker or brokers are following the lead of a client. There is no unlawful access to proprietary information involved with tailgating. By contrast, insider trading involves the acquisition of information that is not considered to be in the public domain, and attempting to benefit from that information before it becomes public knowledge. 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 to be unethical. Brokers would reasonably be expected to make investments based on the results of their own research and evaluation of current market conditions, making any type of investment transaction based on an order issued by a client could be considered suspect. For this reason, many brokers choose to refrain from replicating customer 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 of thumb in regard to tailgating is that choosing to follow the lead of a client and make an investment without researching pertinent factors can carry a degree of risk that is not unlike choosing to make an investment based on instinct alone. In short, most brokers will consider it more prudent to research the investment strategy personally and come to his or her own opinion rather than simply following the lead of a client.