SEC Probing Stock Trade Leaks by Brokerages

The Securities and Exchange Commission is investigating whether large brokerage firms are sharing information about big trading blocks, by such companies as large mutual funds, with favored clients, such as hedge funds, sources have told The New York Times, and the SEC itself confirmed.

Specifically, the Commission is looking into how pervasive the sharing of market-moving information is in the financial services industry. Although mutual funds have long complained about brokerage firms’ front-running their trades for their own benefit, brokerages may be sharing customer trading information with other existing or potential customers. Thus, the practice is more difficult for regulators to detect.

“Mutual fund traders have long complained that their big trades may be being front-run by market participants with inside information about their trades, and they believe the price on those trades suffers as a result,” said Lori Richards, director of the SEC’s Office of Compliance Inspections and Examinations.

“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,” said Andrew M. Brooks, vice president and head of equity trading at T. Rowe Price. “We are absolutely concerned and worried and paranoid about information leakage, information that would allow someone to know about our trades and run ahead.”

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.