What is front-running and how does it apply to domain names?
Last month the 10-day auction for domain name detour.com was supposed to end at GoDaddy. The bids were above $30k but the domain was renewed and the auction cancelled a few hours before the auction was ending.
Most probably some domain investor (or a few too many of those) tried to contact the owner and buy the domain before the auction ended for a cheaper price. The owner realized the domain was expiring and either renewed it and sold it or renewed and thanked the investors for the reminder. I don’t see something wrong here. I don’t do this but people are free to do it.
One problem here is that the domain was registered with Enom (and auctioned at GoDaddy) so the owner could renew it even after the auction had ended and the domain was paid for. This happens with Enom and Tucows expiring domains but not with GoDaddy domains.
Of course all this auction mess happens because GoDaddy won’t fix its system. They fixed it with their own domains (i.e. domains that are registered with GoDaddy) so that domains that are after day 5 of the 10-day auction can’t be renewed by their owner. They CAN fix the problem for Enom/Tucows too but it needs some work to adjust the different grace periods from different registrars to match the GoDaddy expired auction system so they don’t bother. It took GoDaddy years upon years to fix their own expiring domains so I don’t expect much to happen.
But you probably already know all this…
The reason I am writing this post is front-running.
Front-running has a different definition in the financial market and the stock market than it does in domain names. But we need to agree on the definition before we can do something about it.
In the stock market front-running is called “the practice by market-makers of dealing on advance information provided by their brokers and investment analysts, before their clients have been given the information.” This doesn’t apply in domains.
Domain front-running is trying to sell a domain you don’t own and don’t have a permission from the owner to do so.
People that contacted the owner of the domain name detour.com were not front-runners. They simply contacted the owner to purchase the domain name. I don’t do that but I can’t condemn people that do it.
I call front-runners (and you free to correct me if I am wrong) the people that contact potential buyers BEFORE an auction ends. Before an auction ends they don’t own the domain name.
Front-runners contact several buyers with a price that they think will be lower than the final auction price.
If they agree to sell the domain then they bid on the auction to win. If the auction price goes above the agreed price they just abandon the auction and the deal. If the auction price gives then a profit then they buy the domain and immediately sell it.
If they don’t find a buyer then they simply move on to the next domain.
This behavior creates all sorts of problems. The market is skewed as certain domains sell for a lot of money for no apparent reason, people end up paying more in auctions while bidding against a front-runner, and of course many legitimate bidders end up buying domains that have been shopped around and now can have a potential legal problem in their hands.
It is not uncommon for a front-runner to contact a trademark owner, to not reach a deal and then to have someone else buy the domain in the auction. Then the trademark holder goes up against the new owner that has no knowledge of all this.
And of course front-running is even happening with domains that are not in an auction. This can result in lost sales, selling the domain for less or creating all sorts of legal problems.
What can auction houses do about front-running?
They can do 1 main thing:
Monitor front-running and ban anyone that does it. That is easier said than done. But people do report front-running and most of the times nothing happens. The auction houses are not motivated to ban front-runners as they will lose money but I think that their reputation must come first. And a good reputation will eventually bring more customers.
And we domain investors must self-regulate. If we get an email from a front-runner we must report it to the auction house and the auction-house must take action.
(There are other ideas like shorter auctions and/or private auctions etc.)
Is front-running unethical and illegal?
Is it unethical?
Yes, it is. I think that anyone that does it and compromises a domain name does not belong in this business. We must all agree to that or we can’t move forward.
Is it illegal?
I am not a lawyer so I am not sure. And even if I was different countries have different laws. There are different jurisdictions (auction house, front-runner, new owner, TM holder, etc.) and it really depends on the exact situation.
I would certainly sue a front-runner if I knew he/she created a legal problem that costed me money.
Brokers and “brokers”
This seems like a different problem in our industry but…
If an owner has a domain priced at $10k and an authorized broker is quoting a buyer $15k (without the owner knowing) then yes that is essentially front-running.
This usually happens with “brokers” that are selling a domain name without permission from the owner.
The same applies to registrars that almost do the same thing by adding a markup to domain prices. But they hide behind some terms and conditions that you don’t know you have agreed to. Well now you do know: Some registrars continue to markup your domains without your permission.
This markup that seems harmless from registrars can create many problems like lost sales and tax problems. Yes, tax problems. Imagine your tax office learning you sold a domain for $150k while you only claimed you got $100k. Even IF you manage to explain what happened you could end up with a huge attorney/accountant fee.