Front Running

One thing that people like to say is that insider trading in commodities is just fine. It’s the point, even: the main people – if some politicians had their way, the only people – who trade in commodities are the people growing them, or digging them out of the ground, or whatever one does to make commodities on the one hand,1 and the people eating them or burning them or whatever one does with commodities on the other hand. All hedging real-world activity, no speculation. And if you’re a huge wheat grower, and all your wheat was involved in some sort of unexpected wheat accident, then you will probably want to go buy some wheat in the market (to close out your hedges or satisfy your contracted delivery requirements or bake your bread or whatever). And you’ll probably want to do that before prices go up when people realize that the supply of wheat is lower than expected. And you can do that. That’s fine. That’s hedging, more or less, not insider trading.

But that’s not the whole story. Trading in advance of your own inside information is okay, but trading in advance of someone else’s inside information is … sometimes problematic, depending on where you get that information from. For instance, operations people at commodities exchanges really shouldn’t be telling traders on those exchanges confidential information about other traders’ positions and trades. Like Billy Byrnes and Christopher Curtin allegedly did. It’s bad. Humongously bad even: Read more »

“In 2002 I had a contact with the SEC, who were concerned that I was front-running,” he recalls, referring to the practice of using insider information to inform trades. “I started laughing to myself – I knew I wasn’t because I wasn’t doing the trades.” [FT]

Forget shorting the housing market and fueling the financial crisis. What the Senate subcommittee needs to focus on this morning is why Goldman was selling self-described “shitty” products to its own clients.

“Boy that timberwo[l]f was one shi**y deal,” Tom Montag, Goldman’s head of sales and trading, wrote in an email about $1 billion CDO called Timberwolf the firm was trying to shove down the throats of its own clients. The email, written to the head of Goldman’s mortgage desk in June 2007, was released by the Senate panel.

How would you like it if your stock broker sold you some crappy stock he thought was going to tank just so his firm could get it off their books?

Part of the Timberwolf CDO was offloaded to Bear Stearns hedge fund manager Ralph Cioffi, whose fund imploded in the summer of 2007. He was subsequently charged by the Feds with fraud, although a Brooklyn jury found him not guilty. Montag is now Bank of America’s president of global banking and markets.

The email shows Kerry Killinger’s concerns about hiring Goldman as a banker were right on the money. “I don’t trust Goldy on this,” WaMu’s chief wrote in an Oct. 12, 2007, e-mail. “They are smart, but this is swimming with the sharks. They were shorting mortgages big time while they were giving CfC advice,” he said.

Killinger was referring to Countrywide Financial, which hired Goldman in late 2006 to help it raise capital to continue funding mortgages. That assignment gave the firm an inside view of Countrywide’s books and marks on their mortgage products. Although he doesn’t say it explicitly, Killinger hints that Goldman was using that information to trade for its own account.

Goldman Sachs CDO Labeled ‘Shi**y Deal’ by Montag in E-Mail [Bloomberg]

  • 26 May 2009 at 11:08 AM

Morgan Stanley Muscling In On Goldman Turf

This was an entirely familiar story, with the wrong name attached.

A former Morgan Stanley trader has been fined £140,000 and banned by the City watchdog after he traded ahead of clients to profit from their orders. It was the third punishment linked to the bank in the past month.
Nilesh Shroff engaged in so-called “front running” where a dealer, knowing a client’s plans, trades in the same direction before they conduct the client’s order in a n attempt to move the price and profit from the difference between the two values.
The Financial Services Authority said on Tuesday that Mr Shroff, a senior trader at the bank, “disadvantaged” clients on seven occasions between June and October 2007 by partially front running their deals.
It was the third such trading-related punishment linked to Morgan Stanley in the past three weeks. Earlier this month, the bank paid a £1.4m fine – the tenth largest ever meted out by the regulator – for weak systems and controls that allowed a credit derivatives trader, Matthew Piper, to cover up his losses for six months. Mr Piper was himself fined £105,000 and banned.

Look, people. If you want to do that sort of thing you need to head over to Goldman. The act of front running in such a place as Morgan Stanley debases a time-honored profession. One is reminded of watching the occasional idiot wearing a tux to Shake Shack, or perhaps a grand wedding reception… at Trump Tower. An astute sense of place and time should govern these things. At the very least you should consider limiting your front running to cherry-picking orders from your high-speed, low-drag, captive-quant hedge fund.
Obviously the practice is quite above Morgan Stanley traders, who seem to have mashed the keyboard sufficiently to get caught with their pants down. Leave that work to the professionals, folks.
FSA fines Morgan Stanley trader [The Financial Times]