Last week, I’d written about how federal regulators are investigating whether hedge funds are being tipped off about buy and sell orders placed by mutual funds. What prompted the SEC to make such a move? It seems mutual funds’ baselines are hurt by such ‘front running’ since this practice makes the stocks they sell less valuable and stocks they are buying more expensive.
This practice is supposed to be widespread but can be difficult to detect. That’s because in such cases, brokerage employee and the hedge fund trader can have secret agreements to swap information. All this can be laid down to the growing influence of hedge funds – which brokerage would want to be on the wrong side of a multi-trillion dollar industry?
In the recent past, hedge funds have trebled in size and power. They cannot be taken for granted as they have become important customers of Wall Street investment banks. All of these are presently assumptions as the probe is in an early stage now. The SEC has only begun the investigations as of now. Morgan Stanley, Merrill Lynch & Co. and Credit Suisse are supposed to be among the firms that have received letters from the SEC.
So, will the SEC be able to nail the suspects? Not so easy say the experts. Firstly, the SEC will have to distinguish between what constitutes proper information and insider information. This will put them on tricky ground as traders routinely share a huge amount of information with their clients on any given day – and this is legitimate.
For instance once a mutual fund places a large order, a brokerage’s employees must find an investor/s who will take the other side of the trade. This means they have to call clients and find out if they are interested in buying or selling shares. Now, this could easily seem like a tip off. So, we probably have to wait and watch how this game develops