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Citadel LLC unit Surveyor Capital is under federal investigation, per a report that broke late last night on Bloomberg:
…Morgan Stanley and [Morgan Stanley executive Pawan] Passi are intertwined in a sprawling U.S. probe into whether bankers are improperly tipping off investors to stock sales large enough to send prices swinging, according to people with knowledge of the inquiries.
The list of people whose communications are being sought ranges from executives at prominent Wall Street hedge funds, such as Andrew Liebeskind at Citadel’s Surveyor Capital and Jon Dorfman at Element Capital Management, to money managers at smaller firms focusing on block trades, including executives at CaaS Capital Management and Islet Management, and a former employee at Segantii Capital Management, the people said.
The probe is reaching high levels at Citadel. Liebeskind is one of the firm’s top traders.
Federal investigators are looking for evidence that Morgan Stanley helped hedge funds like Surveyor front run block trades. These large trades placed by institutional investors often move markets.
For example, if you know about a large sell order before everyone else does, you can short the shares. You will then make a profit when that big sell order pushes down the price.
But your short sale drives the price down even more. So, the institutional investor gets a worse price for its shares.
Many of these institutional investors are mutual funds that handle the savings of average Americans. This front running costs them money.
The feds are digging deep for information:
In some cases, authorities are seeking access to online chats, mobile phone texts, emails and messages sent by apps, the people said, asking not to be named discussing the confidential demands.
This is important because Wall Street traders often have sensitive conversations via encrypted apps like Signal or WhatsApp on their personal phones. They do this to avoid regulator-required recording of all messages and conversations within banks.
If there’s dirt to be found, it will be in these apps on traders’ personal phones.
When Citadel may have pressured Robinhood to restrict buying of shares of GameStop Corp. and AMC Entertainment Holdings Inc. last year, it hurt retail traders. But front running block trades hurts institutional investors.
Big institutions have far more political power than the average investor. So, expect to see a stronger response from the federal government.
In time, federal agents may be able to use people like Liebeskind as informants on the managers of their funds, such as Ken Griffin. People will do a lot to avoid punishment.
I’m excited to see where this investigation goes.
What do you think investigators will find? Leave me a comment at the bottom and let me know!
There will be no blog on Monday for the holiday. Have a great weekend and see you Tuesday! 🙂
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