This story shows where integrity and greed, the good and the bad are present at all times in the market. Let's take trader A who follows the cardinal rules of trading. He holds an order to buy say $10 million of US treasuries. He knows that such an order will most likely drive the price up. He places his client's order first, then decides to piggy back him and places a trade for his own account after his client's trade is completed.
Trader B holds a similar order from a client to buy $10 million of US treasuries. But unlike trader A, he places an order for his own account first. So he already is in the market. After his trade is completed, he places his client's order which he believes will drive up the price. This practice is called "front running.
For a trader, the temptation of "front running" is ever present. There is no one watching each and every one of your trades. Here is where integrity or greed take over. Trader A acted with integrity. Trader B let greed rule his decisions.
The rules of the exchange are explicit about placing the client's order first. "Front running" is clearly a violation of exchange rules and is often punishable with fines and expulsion. Such was the case for several Morgan Stanley (NYSE: MS) traders. Nilesh Shroff "disadvantaged" his clients at least seven times and the bank had to pay a fine of 1.4 million British pounds. Another trader, Matthew Piper, tried to cover up his losses for six months and was fined 105,000 British pounds. Last week the Financial Services Authority banned another former Morgan Stanley trader, David Redmond, for hiding a risky position from his bosses.
In the case of Mr Shroff, his responsibility was to sell an entire portfolio of stocks. He knew the exact contents of the client's portfolio and his "front running" caused 80% of the stocks in the portfolio to move against the client.
The lesson to be learned here. Do not let greed be your master.
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Reader Comments (Page 1 of 1)
5-27-2009 @ 5:36PM
Iridium said...
Or how about making so brokers can not trade the same securities they are trading for clients.
Brokerage firms should not be allowed to have thier own trading accounts. They will always have access to information that will give them an advantage in the market.
Sure you can say that back loading an order is better than front loading but the broker will still know that because of the huge order he places for the client he will profit from it by being in on the trade. What is there to stop him from telling his close circle at the office about the impending profit making opportunity.
See the client is taking a risk. The broker has the inside information he needs to make a quick buck without taking risk.
That is how we get into the situation we are in where the stock market and current trades make no sense in ragard to the current economic situation.
5-28-2009 @ 5:03AM
al coholic said...
Insider information and broker abuses are hard to curtail.
Attempts by regulators to keep the playing field level while traders find new ways to bypass the spirit of the rules remind me of the old "Spy vs Spy" sagas in Mad Magazine.