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    Are Stockholders Illegally Leaking Confidential Information To Favored Clients?

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    Ronalie Sustuedo
    Stockbrokers may be illegally leaking confidential information about large stock trades to favored clients, allowing those clients to profit at the expense of others. Research shows brokers routinely tell their best, most lucrative clients about activist investor stock purchase orders before required disclosures are filed. This allows those clients to mimic the activist's strategy and earn higher returns. It also appears some fund managers rely on broker-leaked information about other investors' ideas rather than their own skills. Leaking order flow information may be both unethical and illegal, as it violates brokers' fiduciary duty to seek the best price for customers and can disadvantage investors executing trades if the leaked information moves the stock price.

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    Are Stockholders Illegally Leaking Confidential Information To Favored Clients?

    Uploaded by

    Ronalie Sustuedo
    61 views2 pages
    Stockbrokers may be illegally leaking confidential information about large stock trades to favored clients, allowing those clients to profit at the expense of others. Research shows brokers routinely tell their best, most lucrative clients about activist investor stock purchase orders before required disclosures are filed. This allows those clients to mimic the activist's strategy and earn higher returns. It also appears some fund managers rely on broker-leaked information about other investors' ideas rather than their own skills. Leaking order flow information may be both unethical and illegal, as it violates brokers' fiduciary duty to seek the best price for customers and can disadvantage investors executing trades if the leaked information moves the stock price.

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    Stockholders

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    ARE-STOCKHOLDERS-ILLEGALLY-LEAKING-CONFIDENTIAL-INFORMATION-TO-FAVORED-CLIENTS-Lovely-Ducusin.docx

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    Stockbrokers may be illegally leaking confidential information about large stock trades to favored clients, allowing those clients to profit at the expense of others. Research shows brokers routinely tell their best, most lucrative clients about activist investor stock purchase orders before required disclosures are filed. This allows those clients to mimic the activist's strategy and earn higher returns. It also appears some fund managers rely on broker-leaked information about other investors' ideas rather than their own skills. Leaking order flow information may be both unethical and illegal, as it violates brokers' fiduciary duty to seek the best price for customers and can disadvantage investors executing trades if the leaked information moves the stock price.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    61 views2 pages

    Are Stockholders Illegally Leaking Confidential Information To Favored Clients?

    Uploaded by

    Ronalie Sustuedo
    Stockbrokers may be illegally leaking confidential information about large stock trades to favored clients, allowing those clients to profit at the expense of others. Research shows brokers routinely tell their best, most lucrative clients about activist investor stock purchase orders before required disclosures are filed. This allows those clients to mimic the activist's strategy and earn higher returns. It also appears some fund managers rely on broker-leaked information about other investors' ideas rather than their own skills. Leaking order flow information may be both unethical and illegal, as it violates brokers' fiduciary duty to seek the best price for customers and can disadvantage investors executing trades if the leaked information moves the stock price.

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    ARE STOCKHOLDERS ILLEGALLY LEAKING CONFIDENTIAL INFORMATION TO FAVORED

    CLIENTS?

    Stockbrokers are taking advantage of their privileged position to increase profits for favored investors and hedge
    funds, all at the expense of their other customers.

    Brokers routinely leak confidential information about large stock trades to their best, most lucrative clients.

     When a savvy activist investor submits a trading order through a brokerage firm.
    (for example, the brokers will exploit this information by telling their favorite clients all about it. Those
    clients can then imitate the activist’s strategy, thus earning higher returns themselves—to the detriment of
    the rest of the market, which was not privy to the leak.)

    SOME MANAGERS APPEAR TO FREE-RIDE ON THE INFORMATION PROVIDED BY STOCKBROKERS


    ABOUT THE BEST IDEAS OF OTHER INVESTORS

     an important source of returns for fund managers in the stock market is not their superior skill or
    investment acumen. Rather, some managers appear to free-ride on the information provided by
    stockbrokers about the best ideas of other investors, which in turn is acquired thanks to the brokers’ ability
    to observe order flow before the rest of the market.

    Stockbrokers are intermediaries who buy and sell stocks for retail and institutional clients, either for a fee or
    commission. While their role in the market has received little public scrutiny, the research suggests that more
    scrutiny is warranted.

    Schedule 13D is a form that investors must submit to the SEC within 10 days of buying a 5 percent (or greater)
    stake in a company. It’s a legal requirement, which, like many disclosure requirements, is meant to level the
    playing field. Once that form is filed, everyone knows which firm an activist investor is targeting.

     activists’ target companies tend to experience significant price changes once the activists’ strategies are
    released. In other words, the stock price of the target company goes up.

     until that form is filed, only two parties are supposed to know about the trade order: the investor who
    initiated the transaction, and the broker who orchestrated it. But the evidence suggests that brokers
    tend to spill the beans to their other clients before the form is filed.

     To gauge whether brokers indeed were blabbing information about activist investor activity, the
    researchers looked at the trading activity in the 10 days preceding the 13D filing. If a broker orchestrated
    the trades for an activist, did that broker’s best clients soon follow suit? If brokers were releasing
    information about their order flow, they should expect other traders to buy the stock of the target company
    before the 13D is filed, which is when the information is released to all market participants.

     in the 10 days preceding a 13D filing, a broker’s best clients—institutional investors who routinely
    paid high commissions or made large orders—were 10 percentage points more likely to buy the
    target company’s stock than they were in the month following the 13D filing—that is, once
    everyone knew the activist had acquired a stake in that company. Meanwhile, the broker’s other,
    smaller clients were more likely to sell that company’s stock in the days preceding a 13D filing,
    which suggested that they had no idea an activist investor was about to boost the stock price.

    WHY IT MIGHT BE ILLEGAL TO LEAK ORDER FLOW INFORMATION

    Leaking information about stock trades might be both unethical and illegal, due to a fiduciary duty called “best
    price execution.”

    According to Securities and Exchange Commission “Brokers are legally required to seek the best execution
    reasonably available for their customers' orders.”

     If brokers leak information about the trades they execute, they end up causing a price disadvantage for the
    investors who ordered those trades. That’s because these transactions are deliberately executed slowly, so
    any information leaked during that time may end up affecting the stock price before the transaction is
    completed.

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