DOCSLIB.ORG

Gibson, Christopher M

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Gibson, Christopher M ~-1;'· / r :r-- - UNITED STATES OF AMERICA RECEIVED Before the JUN 1 9 2017 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 OFFICE OF THE SECRE Administrative Proceeding File No. 3-17184 In the Matter of CHRISTOPHER M. GIBSON, Respondent. DIVISION OF ENFORCEMENT'S OPPOSITION BRIEF June 19, 2017 H. Michael Semler Gregory R. Boclcin Paul J. Bohr George J. Bagnall U.S. Securities and Exchange Commission Division of Enforcement 100 F Street, N .E. Washington, D.C. 20549 Counsel for Division of Enforcement r > Table of Contents INTRODUCTION ................................................................................................................. 1 THE EVIDENTIARY RECORD .......................................................................................... 1 THE INITIAL DECISION................................................................................................... 11 ARGUMENT ........................................................................................................................ 13 I. GIBSON VIOLATED SECTIONS 206(1) AND (2) OF THE ADVISORS ACT......... 13 A. Gibson Was An Investment Adviser Subject To Section 206 ............................ 13 1. Investors Were Told That Gibson Would Manage The Fund's Investments And Gibson Did So ................................................................... 14 2. Gibson Was An Investment Adviser Even If He Acted In The Name Of Geier Capital................................................................................. 15 3. Gibson Was an Investment Adviser After Suspending Management Fees Beginning October 1, 2011 ............................................. 18 B. As An Investment Adviser, Gibson Was Subject To Federal Fiduciary Duties And Prohibitions Under Sections 206( 1) and (2)................... .................. .. 19 1. Sections 206(1) and (2) Impose Fiduciary Duties And Prohibit Fraudulent Conduct ..... ........ ............... ..................................... .......................... 19 2. Gibson's Obligations Under Section 206 Were Not Nullified By The Fund's Offering Documents ...................................................................... 20 3. The Offering Documents Did Not Disclose The Conflicts Of Interest Gibson Created And Exploited............................................................ 21 C. Gibson Engaged In "Front Running" On September 26, 2011 .............................. 23 1. Trading Based On Knowledge Of A Client's Intention To Trade Constitutes "Front Running" ......... ...... .......... ... ..... ...... ............ ............ ... .. .. ..... 23 2. Gibson Knew On September 26, 2011, That The Fund Planned To Sell A Large Block OfTRX Shares ........................................................ 25 3. Information Regarding The Fund's Intention To Sell Its TRX Shares Was Material Information.......................................................... 25 4. Gibson Acted With Scienter In Front Running The Fund................................. 27 D. Gibson Favored Hull Over The Fund By Using Fund Assets To Purchase Hull's TRX Shares In October 2011....................................................... 28 E. Gibson Engaged In Front Running In October and November 2011 Using Put Option Contracts ..................................................................................... 31 II. GIBSON VIOLATED SECTION 206(4) AND RULES 206(4)-8(A)(l) AND (2) ....... 32 III. GIBSON'S FRONT RUNNING VIOLATED THE ANTI-FRAUD PROVISIONS OF THE EXCHANGE ACT ................................................................. 34 IV. THERE IS NO MERIT TO GIBSON'S CONSTITUTIONAL CHALLENGE ............ 35 V. GIBSON HAS FAILED TO IDENTIFY ANY ERROR IN THE ADMISSION OF EVIDENCE ............................................................................................................. 35 VI. THE SANCTIONS IMPOSED IN THE INITIAL DECISION ARE APPROPRIATE ................................................................................................................. 37 A. Cease-and-Desist Order and Industry Bar................................................................ 37 B. Disgorgement........................................................................................................... 38 C. Civil Penalties.............................................................................................................. 39 CONCLUSION .................................................................................................................... 41 Table of Authorities Cases Abrahamson v. Fleschner, 568 F.2d 862 (2d Cir. 1977) .............................................................................. 13, 15 Banca Cremi, S.A. v. Alex Brown & Sons. Inc., 132 F.3d 1017 (4th Cir. 1997) ...............................................................................29 Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016) ............................................................................ 35 Bank of China v. NBM LLC. 359 F.3d 171 (2d Cir. 2004) ................................................................................22 Basic Inc. v. Levinson, 485 U.S. 224 (1988) ......................................................................................... 26 Clawson v. SEC, 2005 WL 2174637 (9th Cir. Sept. 8, 2005) ............................................................... 12 Collins v. SEC, 736 F.3d 521 (D.C. Cir. 2013) ............................................................................. .40 Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) ..........................................................................................27 Geman v. SEC, 334 F.3d 1183 (10th Cir. 2003) ............................................................................ .34 Goldstein v. SEC, 451 F.3d 873 (D.C.Cir. 2006) .............................................................................. 13 Holmes v. Bateson, 583 F.2d 542 (1st Cir.1978) ................................................................................. 26 In re G-I Holdings. Inc., 755 F.3d 195 (3rd Cir. 2014) ...............................................................................29 In the Matter of Alan Gavomik, SEC Rel. No. 3972, 2014 WL 6617088.(Nov. 24, 2014) ................................................ 15 In the Matter of Bennett Gr. Fin. Serv., LLC & Dawn J. Bennett, SEC Rel. No. 4676, 2017 WL 1176053 (Mar. 30, 2017) .............................................. .35 In the Matter of C. James Padgett et al, SEC Rel. No. 38423, 1997 WL 126716 (March 20, 1997) ............................................. 12 In the Matter of Dennis Malouf, SEC Rel. No. 4463, 2016 WL 4035575 (July 27, 2016) ........................................... .13, 16 In the Matter of Harding Advisory LLC & Wing F. Chau, SEC Rel. No. 4600, 2017 WL 66592 (Jan. 6, 2017) .................................................... .35 In the Matter of John J. Kenny, SEC Rel. No. 8234, 2003 WL 21078085 (May 14, 2003) ............................................. 16 In the Matter of J.S. Oliver Capital, SEC Rel. No. 4431, 2016 WL 3361166 (June 17, 2016) ........................................... 31, 40 In the Matter of Lisa B. Primo, SEC Rel. No. 476, 2012 WL 6705813 (Dec. 26, 2012) ................................................... 18 In the Matter of Marc N. Geman, SEC Rel. No. 1924, 2001WL124847 (Feb. 14, 2001) ................................................ .34 In the Matter of Robert Thomas Clawson, SEC Rel. No. 48143, 2003 WL 21539920 (July 9, 2003) .............................................. 12 In the Matter of Ronald Speaker, SEC Rel. No.1605, 1997WL9871(Jan.13,1997)...................................................... 17 In the Matter of Sanford Michael Katz, SEC Rel. No. 4679, 2017 WL 1311651(April4, 2007) ............................................... .17 In the Matter of Sylvester King, Jr., SEC Rel. No. 4648, 2017 WL 549107 (Feb. 10, 2017) ................................................ .17 In the Matter of The Robare Group, Ltd., et al, SEC Rel. No. 4566, 2016 WL 6596009 (Nov. 7, 2016) ................................... 20, 22, 27, 31 In the Matter of ZPR Investment Management, Inc., SEC Rel. No. 4249, 2015 WL 6575683 (Oct. 30, 2015) ................................................. .16 Koch v SEC, 793 F.3d 147 (D.C. Cir. 2015) .............................................................................. 16 Laird v. Integrated Res., Inc., 897 F.2d 826 (5th Cir. 1990) .............................................................................. .34 ii Lincoln National Life Insur. Co. v. Snyder, 722 F. Supp. 2d 546 (D. Del. 2010) ........................................................................22 Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) ................................................................................ 27 Puerto Rico Telephone Co., Inc. v. SprintCom.lnc., 662 F.3d 74 (1st Cir. 2011) ................................................................................ 29 SEC v. Bergin, No. 3:13-CV-1940-M, 2015 WL 4275509 (N.D. Tex. July 15, 2015) ............................24, 26 SEC v. Blavin, 760 F.2d 706 (6th Cir. 1985) ...............................................................................27 SEC v. Boll§, 401 F.Supp. 2d 43 (D.D.C. 2005) ........................................................................... 15 SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963) ....................................................................... .19, 20, 23, 27, 33 SEC v. DiBella, No. 04-CV-1342, 2007
Load more

Recommended publications
  • Equity Trading in the 21St Century
    Equity Trading in the 21st Century February 23, 2010 James J. Angel Associate Professor McDonough School of Business Georgetown University Lawrence E. Harris Fred V. Keenan Chair in Finance Professor of Finance and Business Economics Marshall School of Business University of Southern California Chester S. Spatt Pamela R. and Kenneth B. Dunn Professor of Finance Director, Center for Financial Markets Tepper School of Business Carnegie Mellon University 1. Introduction1 Trading in financial markets changed substantially with the growth of new information processing and communications technologies over the last 25 years. Electronic technologies profoundly altered how exchanges, brokers, and dealers arrange most trades. In some cases, innovative trading systems are so different from traditional ones that many political leaders and regulators do not fully appreciate how they work and the many benefits that they offer to investors and to the economy as a whole. In the face of incomplete knowledge about this evolving environment, some policymakers now question whether these innovations are in the public interest. Technical jargon such as “dark liquidity pools,” “hidden orders,” “flickering quotes,” and “flash orders” appear ominous to those not familiar with the objects being described. While professional traders measure system performance in milliseconds, others wonder what possible difference seconds—much less milliseconds—could have on capital formation within our economy. The ubiquitous role of computers in trading systems makes many people nervous, and especially those who remember the 1987 Stock Market Crash and how the failure of exchange trading systems exacerbated problems caused by traders following computer-generated trading strategies. Strikingly, the mechanics of the equity markets functioned very well during the financial crisis, despite the widespread use of computerized trading.
    [Show full text]
  • Informational Inequality: How High Frequency Traders Use Premier Access to Information to Prey on Institutional Investors
    INFORMATIONAL INEQUALITY: HOW HIGH FREQUENCY TRADERS USE PREMIER ACCESS TO INFORMATION TO PREY ON INSTITUTIONAL INVESTORS † JACOB ADRIAN ABSTRACT In recent months, Wall Street has been whipped into a frenzy following the March 31st release of Michael Lewis’ book “Flash Boys.” In the book, Lewis characterizes the stock market as being rigged, which has institutional investors and outside observers alike demanding some sort of SEC action. The vast majority of this criticism is aimed at high-frequency traders, who use complex computer algorithms to execute trades several times faster than the blink of an eye. One of the many complaints against high-frequency traders is over parasitic trading practices, such as front-running. Front-running, in the era of high-frequency trading, is best defined as using the knowledge of a large impending trade to take a favorable position in the market before that trade is executed. Put simply, these traders are able to jump in front of a trade before it can be completed. This Note explains how high-frequency traders are able to front- run trades using superior access to information, and examines several proposed SEC responses. INTRODUCTION If asked to envision what trading looks like on the New York Stock Exchange, most people who do not follow the U.S. securities market would likely picture a bunch of brokers standing around on the trading floor, yelling and waving pieces of paper in the air. Ten years ago they would have been absolutely right, but the stock market has undergone radical changes in the last decade. It has shifted from one dominated by manual trading at a physical location to a vast network of interconnected and automated trading systems.1 Technological advances that simplified how orders are generated, routed, and executed have fostered the changes in market † J.D.
    [Show full text]
  • How to Become A
    GUIDE TO BECOMING A COMMODITY TRADING ADVISOR Guide to Becoming a CTA Dean E. Lundell © Copyright 2004 Chicago Mercantile Exchange Guide to Becoming a CTA 1 TABLE OF CONTENTS 5 Acknowledgements Chapter One 7 Market Trends for Alternative Investments Chapter Two 9 The Business of Being a CTA Business Plan and Structure Staffing Growth Management Office Equipment and Trading Systems Start-Up Costs Brokerage Firms and Commission Rates Commissions and Clients Execution Services Professional Services Chapter Three 15 Creating Your Trading Product Overview Mechanical Systems Discretionary Strategies Diversified Strategies Single Sector Strategies Strategy Design and Testing Slippage Control Institutional vs. Retail Investors Chapter Four 23 Marketing Your CTA Business Track Record Raising Funds Account Sizes Professional Money Raisers Client Relationships National Futures Association Rules Chapter Five 31 The Measures of CTA Success Performance and Consistency of Returns Limiting Drawdowns Length of Track Record Becoming Established Rates of Growth 2 Guide to Becoming a CTA Chapter Six 35 Risk Management for CTAs Diversification Risk per Trade Position Sizes and Risk Exposure Trading in Units Kick-Out Levels Volatility Measurement and Control Margin-to-Equity Ratio Commission-to-Equity Ratio Stop Orders Common Questions Chapter Seven 43 CTA Performance Records Regulatory Requirements Proprietary Performance Record Simulated or Hypothetical Reports Composite Performance Records Rate of Return Calculations Establishing Your Performance Record
    [Show full text]
  • GS&Co. Disclosure Regarding FINRA Rule 5270
    GOLDMAN SACHS & Co. LLC (“GS&Co.”) Prohibition on Front Running Client Block Transactions FINRA Rule 5270 prohibits a broker-dealer from trading for its own account while taking advantage of material, non-public market information concerning an imminent block transaction in a security, a related financial instrument1 or a security underlying the related financial instrument prior to the time information concerning the block transaction has been made publicly available or has otherwise become stale or obsolete. GS&Co. employees are strictly prohibited from engaging in activity that violates Rule 5270. The Rule provides exceptions to the general prohibition for certain transactions. For example, the Rule does not preclude a broker-dealer from trading for its own account for purpose of fulfilling or facilitating the execution of a client’s block transaction. A broker- dealer is also permitted to engage in hedging or pre-hedging when the purpose of the trading is to fulfill the client order and the broker-dealer has disclosed such trading activity to the client. This hedging or pre-hedging activity may coincidentally impact the market prices of the securities or financial instruments a client is buying or selling. As always, GS&Co. conducts this trading in a manner designed to limit market impact and consistent with its best execution obligations. 1 For purposes of this Rule, the term "related financial instrument" means any option, derivative, security-based swap, or other financial instrument overlying a security, the value of which is materially related to, or otherwise acts as a substitute for, such security, as well as any contract that is the functional economic equivalent of a position in such security.
    [Show full text]
  • How Prosecutors Misconstrued OTC Market-Making Practices by Sujay Dave and George Oldfield (June 25, 2019, 5:24 PM EDT)
    Portfolio Media. Inc. | 111 West 19th Street, 5th Floor | New York, NY 10011 | www.law360.com Phone: +1 646 783 7100 | Fax: +1 646 783 7161 | [email protected] How Prosecutors Misconstrued OTC Market-Making Practices By Sujay Dave and George Oldfield (June 25, 2019, 5:24 PM EDT) Recent federal court cases highlight the challenges involved in judging acceptable market-making behavior in over-the-counter markets.[1] In these cases, prosecutors interpreted trader bluster and barter as fraud, customary prehedging of pending OTC block orders as front-running, and self-interested principal trading as a violation of a market maker's inferred duty to a counterparty. The standards applied to evaluate market-making behavior, however, should be consistent with established and customary protocols in OTC institutional markets. Sujay Dave In these markets, haggling is the norm, prepositioning and forward sales are risk management techniques, and market makers trade for their own accounts to earn a profit by making buys and sells. Here we describe how market makers work in various types of markets for financial instruments, and the reasons why mixing up exchange trading practices with well-established OTC trading protocols might be disruptive in OTC markets. George Oldfield Role of Market Makers In OTC markets, the market maker is a principal trader who buys from sellers at a “bid” price and sells to buyers at a higher “ask” price. The market maker's objective is to make a profit from the bid-ask spread. Principal-based market making is a basic financial service that provides transaction immediacy to other traders and liquidity in financial markets.
    [Show full text]
  • Sok: Transparent Dishonesty: Front-Running Attacks on Blockchain
    SoK: Transparent Dishonesty: Front-running Attacks on Blockchain. Shayan Eskandariyz, Seyedehmahsa Moosaviy, Jeremy Clarky † Gina Cody School of Engineering and Computer Science Concordia University ‡ ConsenSys Diligence Abstract. We consider front-running to be a course of action where an entity benefits from prior access to privileged market information about upcoming transactions and trades. Front-running has been an is- sue in financial instrument markets since the 1970s. With the advent of the blockchain technology, front-running has resurfaced in new forms we explore here, instigated by blockchain's decentralized and transparent nature. In this paper, we draw from a scattered body of knowledge and instances of front-running across the top 25 most active decentral ap- plications (DApps) deployed on Ethereum blockchain. Additionally, we carry out a detailed analysis of Status.im initial coin offering (ICO) and show evidence of abnormal miner's behavior indicative of front-running token purchases. Finally, we map the proposed solutions to front-running into useful categories. 1 Introduction Blockchain technology enables decentralized applications (DApps) or smart con- tracts. Function calls (or transactions) to the DApp are processed by a decen- tralized network. Transactions are finalized in stages: they (generally) first relay around the network, then are selected by a miner and put into a valid block, and finally, the block is well-enough incorporated that is unlikely to be reorganized. Front-running is an attack where a malicious node observes a transaction after it is broadcast but before it is finalized, and attempts to have its own transaction confirmed before or instead of the observed transaction.
    [Show full text]
  • Activeshares Brochure (PDF)
    Powering Portfolio Innovation ® BY PRECIDIAN INVESTMENTS® ActiveShares® is a ground-breaking ETF structure that combines the benefits of a traditional ETF with the flexibility and confidentiality of an actively managed mutual fund. ActiveShares is a registered trademark of Precidian Investments. INTRODUCING ACTIVESHARES An Evolution in ETFs An Innovation for A Smart Solution Active Management for Investors Delivers active strategies in a new ETF solution, Seizes the full potential Unlocks the power of combining the cost-effective of active investing in a your portfolio with the and tax-efficient structure powerful ETF structure while advantages of ETFs, the with real-time pricing in a safeguarding the proprietary clarity of real-time portfolio confidential format. investment decisions of your valuation, and the insights active managers. of active management. The result… Active management with the potential to keep more of what you earn. Visit www.activeshares.com for more information. 2 WHAT IS ACTIVESHARES? ActiveShares - combining the benefits of confidential active management with the advantages of an ETF. Mutual Fund Traditional ETF ActiveShares ETF Lower Cost Tax Efficiency Intraday Trading Arbitrage Eligible Mitigates Front-running Mitigates Loss of Intellectual Property (IP) Discloses Monthly/ Monthly/ Daily Portfolio Holdings Quarterly Quarterly ActiveShares may be the ETF structure for which many active managers and investors have been waiting. 3 ACTIVESHARES ADVANTAGES Tax Efficiency Because ActiveShares is an ETF structure, investors in ActiveShares ETFs will benefit from the same tax advantages of traditional ETFs, where direct fund transactions are typically done in-kind with Authorized Participants. These cashless transactions are not taxable events and therefore help mitigate the yearly capital gain distributions that impact many mutual funds.
    [Show full text]
  • Why Martha Stewart Did Not Violate Rule 10B-5: on Tipping, Piggybacking, Front-Running and the Fiduciary Duties of Securities Brokers© Ray J
    The University of Akron IdeaExchange@UAkron Akron Law Review Akron Law Journals July 2015 Why Martha Stewart Did Not Violate Rule 10b-5: On Tipping, Piggybacking, Front-Running and the Fiduciary Duties of Securities Brokers© Ray J. Grzebielski Please take a moment to share how this work helps you through this survey. Your feedback will be important as we plan further development of our repository. Follow this and additional works at: http://ideaexchange.uakron.edu/akronlawreview Part of the Antitrust and Trade Regulation Commons, and the Business Organizations Law Commons Recommended Citation Grzebielski, Ray J. (2007) "Why Martha Stewart Did Not Violate Rule 10b-5: On Tipping, Piggybacking, Front- Running and the Fiduciary Duties of Securities Brokers©," Akron Law Review: Vol. 40 : Iss. 1 , Article 2. Available at: http://ideaexchange.uakron.edu/akronlawreview/vol40/iss1/2 This Article is brought to you for free and open access by Akron Law Journals at IdeaExchange@UAkron, the institutional repository of The nivU ersity of Akron in Akron, Ohio, USA. It has been accepted for inclusion in Akron Law Review by an authorized administrator of IdeaExchange@UAkron. For more information, please contact [email protected], [email protected]. Grzebielski: Fiduciary Duties of Securities Brokers GRZEBIELSKIFINAL.DOC 3/19/2007 12:21:48 PM WHY MARTHA STEWART DID NOT VIOLATE RULE 10B- 5: ON TIPPING, PIGGYBACKING, FRONT-RUNNING AND © THE FIDUCIARY DUTIES OF SECURITIES BROKERS Ray J. Grzebielski∗ I. INTRODUCTION On December 27, 2001, Martha Stewart sold
    [Show full text]
  • Regulatory Notice 18-05
    Regulatory Notice 18-05 Government Securities February 6, 2018 Initiative Notice Type FINRA Requests Comment on the Application of 00 Request for Comment Certain Rules to Government Securities and to Suggested Routing Other Debt Securities More Broadly 00 Compliance Comment Period Expires: April 9, 2018 00 Fixed Income 00 Investment Banking 00 Legal Summary 00 Market Making FINRA is requesting comment on the application of the following rules 00 Operations to government securities, including U.S. Treasury securities: FINRA Rules 00 Research 1 2242 (Debt Research Analysts and Debt Research Reports); 5240 (Anti- 00 Senior Management Intimidation/Coordination); 5250 (Payments for Market Making); 5270 00 Trading (Front Running of Block Transactions); 5280 (Trading Ahead of Research Reports); 5320 (Prohibition Against Trading Ahead of Customer Orders); and NASD Rules 1032(f) (Securities Trader), 1032(i) (Limited Representative Key Topics – Investment Banking) and 1050 (Registration of Research Analysts).2 In 00 Anti-Intimidation and Coordination addition, FINRA is requesting comment on the application of FINRA Rule 5320 00 Customer Order Protection as well as NASD Rules 1032(f) and 1050 to all debt securities, in addition to 00 Exempted Securities government securities. 00 Fixed Income Securities Questions regarding this Notice should be directed to: 00 Front Running 00 Government Securities 00 Afshin Atabaki, Associate General Counsel, Office of General Counsel 00 (OGC), at (202) 728-8902; or Investment Banking 00 Market Making 00 Meredith Cordisco, Associate General Counsel, OGC, at (202) 728-8018. 00 Research Activities 00 Securities Trading 00 Trading Ahead 00 Treasury Securities Referenced Rules & Notices 00 Exchange Act Sections 3(a)(10), (12), (29) and (42) 00 FINRA Rules 0150, 2010, 2241, 2242, 2320, 4370, 5240, 5250, 5270, 5280, 5310, 5320, 6420 and 6710 00 NASD Rules 1021, 1022, 1031, 1032 and 1050 00 SEA Regulation NMS 00 SEC Regulation AC 1 18- 05 February 6, 2018 Action Requested FINRA encourages all interested parties to comment.
    [Show full text]
  • The Potential Effects of More Frequent Portfolio Disclosure on Mutual
    INVESTMENT COMPANY INSTITUTE® PERSPECTIVE The Potential Effects of its shareholders. In particular, the petitioners Vol. 7 / No. 3 requested that the SEC require funds to disclose June 2001 More Frequent Portfolio holdings on a monthly or quarterly basis, within Disclosure on Mutual either 30 or 60 days after the end of the month or Perspective is a series Fund Performance quarter.4 of occasional papers published by the This issue of Perspective examines the potential Investment Company effects of more frequent portfolio disclosure on the Institute, the national by Russ Wermers1 performance of mutual funds. This study concludes association of the that, with more frequent portfolio disclosure, the American investment total return shareholders receive from mutual fund company industry. 1. OVERVIEW investments would likely be lower than that under the current disclosure standard. The principal John Rea, The U.S. Securities and Exchange Commission reasons for this conclusion are summarized as executive editor; (SEC) is considering changes to the disclosure follows. Craig Tyle, requirements for the semiannual and annual executive editor; reports provided by mutual funds to their Front running of mutual fund trades could Sue Duncan, shareholders.2 These periodic shareholder reports significantly increase, which could increase managing editor. discuss fund investment strategies and recent fund trading costs. performance. In addition, they contain a variety More frequent portfolio disclosure would enable of other information, including the fund’s
    [Show full text]
  • Dynamic Trading: Price Inertia and Front-Running∗
    Dynamic Trading: Price Inertia and Front-Running∗ Yuliy Sannikov Andrzej Skrzypacz Graduate School of Business Graduate School of Business Stanford University Stanford University [email protected] [email protected] December 7, 2016 Abstract We build a linear-quadratic model to analyze trading in a market with pri- vate information and heterogeneous agents. Agents receive private taste/inventory shocks and trade continuously. Agents differ in their need for trade as well as the cost to hold excessive inventory. In equilibrium, trade is gradual. Trading speed depends on the number and market power of participants, and trade among large market participants is slower than that among small ones. Price has momentum due to the actions of large traders: it drifts down if the sell- ers have greater market power than buyers, and vice versa. The model can also answer welfare questions, for example about the social costs and benefits of market consolidation. It can also be extended to allow private information about common value. 1 Introduction. A market with heterogeneous investors { large institutions, small retail investors, liquidity providers and high-frequency traders { presents many puzzles. What de- termines the speed of trading? What is the link between microstructure and time series properties of prices, such as momentum and excess volatility? What is the price impact of large trades, and how much does it matter for optimal execution of transactions? What about phenomena such as front-running { are they detrimental ∗We are grateful to seminar participants at Yale, the New York Fed, Cambridge, Stanford, Latin American Econometric Society Meetings, LBS, Harvard, MIT, Northwestern, Chicago, NYU, Georgetown, Duke, the University of Helsinki, the University of Lausanne, Caltech, Collegio Carlo Alberto and Universidad de Chile for helpful comments.
    [Show full text]
  • Do Hedge Funds Profit from Mutual-Fund Distress?
    Do Hedge Funds Profit From Mutual-Fund Distress? Joseph Chen USC Samuel Hanson Harvard University Harrison Hong Princeton University Jeremy C. Stein Harvard University and NBER First draft: September 2007 This draft: April 2008 Abstract: This paper explores the question of whether hedge funds engage in front- running strategies that exploit the predictable trades of others. One potential opportunity for front-running arises when distressed mutual funds—those suffering large outflows of assets under management—are forced to sell stocks they own. We document two pieces of evidence that are consistent with hedge funds taking advantage of this opportunity. First, in the time series, the average returns of long/short equity hedge funds are significantly higher in those months when a larger fraction of the mutual-fund sector is in distress. Second, at the individual- stock level, short interest rises in advance of sales by distressed mutual funds. We are grateful for helpful feedback from Robin Greenwood, Jeff Kubik, Andrei Shleifer, Erik Stafford, seminar participants at the Federal Reserve Bank of New York and the Yale School of Management, and students in Stein’s Economics 1760 and 2728 classes. I. Introduction Consider an arbitrageur who learns that a big investor is about to sell a large amount of a particular stock, and who understands that this sale is likely to have a significant price impact. How might the arbitrageur take advantage of this knowledge? Broadly speaking, there are two types of trading strategies available to him. The first strategy, “liquidity provision”, involves the arbitrageur buying the stock after the big investor has sold it and knocked down the price, and then holding as the price reverts towards its pre-sale value.
    [Show full text]