Wall Street Banks Turn on Each Other as Federal Probe Looms

Morgan Stanley has been under federal investigation since February. Now, banks are turning on each other and unidentified sources are leaking information.

From a report that broke overnight in the Financial Times:

…according to reports, two of Morgan Stanley’s competitors, Credit Suisse and Goldman Sachs, have gone so far as to alert the US Attorney’s office and the Hong Kong regulator SFC, respectively, about “potential issues” around block trades executed by Morgan Stanley.

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The SEC and DOJ are investigating Morgan Stanley’s stock trading business.

Morgan frequently handles large “block trades” for institutional investors. There are allegations that it may have tipped off hedge funds to big sales that could move markets.

This would allow hedge funds to short the stock before the big block of shares is sold. Such a trade could offer quick, easy profits.

Why would Morgan do this? Because hedge funds are among the bank’s best clients.

Hedge funds have “prime brokerage” arrangements with big Wall Street banks like Morgan. Those trading accounts mean lots of juicy fees for the bank.

Let’s say you want to get or keep a lucrative customer. You might be tempted to give them valuable information, even if it’s illegal.

Nothing has been proven against Morgan yet. It’s possible that they were just conducting big trades in a straightforward and honest way.

But watching these big banks turn on each other gives me pause. I have rarely seen major banks reporting each other to regulators, as Goldman and Credit Suisse did with Morgan.

What’s more, Morgan has suspended some of its block trading staff. Why would they do that if they had done nothing wrong?

But it’s not just the big banks that are talking. Unidentified whistleblowers are also offering up information on possible wrongdoing at Morgan:

This noise goes well beyond the normal thrust-and-parry of a hyper-competitive business. Visceral grudges and grievances underlie these complaints; the Feds are on the case; unidentified people “close to the investigation” are briefing the media and naming names; and careers, livelihoods and reputations hang in the balance.

Perhaps it’s all a big misunderstanding. But my gut tells me where there’s smoke, there’s fire.

Do you think Morgan and other big banks help hedge funds front run trades? Leave a comment at the bottom and let me know.

More on markets:

AMC Fails to Deliver Pass 2.6 Million in New Report

New Law Could Put Big Short Sellers on the Endangered Species List

Bill Ackman Loses $4.8 Billion

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Photo: “Morgan Stanley Headquarters” by Alex E. Proimos is licensed under CC BY-NC 2.0.


13 thoughts on “Wall Street Banks Turn on Each Other as Federal Probe Looms”

  1. Obviously they front run retail trades. They also spoof prices. Then when you want to buy 100 shares but nobodies selling at that price they print synthetic shares so the price doesn’t go up since they never really bought the shares. They route orders to dark pools and off market exchanges so that options end out of the money for retail traders. Like the casino turning all of their slot machines to a lose only setting. They see retail go long and they push the price down in the final 15 minutes and rake up all the money.

    Liked by 1 person

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