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NEW YORK - Wall St's biggest banks are under investigation for allegedly tipping off favoured hedge-fund clients when other customers were planning big share trades.
The hedge funds are accused of profiting from the information by using it to predict when a big sell or buy order will move a particular stock.
The Securities and Exchange Commission, Wall St's watchdog, is examining data from dozens of banks and their clients over two weeks of last year. Investment banks involved include Morgan Stanley, Deutsche Bank and Merrill Lynch.
Mutual fund managers have long fulminated about the practice of "front-running", where traders take positions knowing that a big buy or sell order is about to move the price of a stock. It makes it more difficult for the fund to do the trade at a good price, and so disadvantages its investors, who are usually ordinary savers.
Hedge funds - which cater only to rich investors - pass more business through brokerage firms, making them more valuable clients.
SEC spokesman John Nester said that the commission had a strong track record in acting against insider dealing. "What is new is the methodology of looking closely at the same time period and at the same trade."
Investigators will comb through millions of trades carried out in the equity and derivatives markets in the final two weeks of September, traditionally a busy time for mutual fund managers rearranging their portfolios.
They believe that hedge funds have given tip-offs from one broker that they then acted on by trading through a different firm. That makes the paper trail more obscure, but circumstantial evidence could be thrown up by a careful analysis of data.
"If an investment bank is tipping a hedge fund on a trade we are doing on Dell, those people all need to go to jail," Andrew Brooks, vice-president and head of equity trading at mutual fund company T Rowe Price, told the New York Times.
- INDEPENDENT
