SF Mutual Fund Exec Front-Ran His Fund's Trades
propublica.orgThe hn title claims more certainty than the article does.
An equally plausible version of this story is that a very rich fund exec came to the personal conclusion that VMware was a great buy & bought, then had some part in convincing his firm of same, because that kind of judgment is what he’s there for. None of that is illegal.
As the article makes clear, it’s only front-running if the employee has reason to believe his firm will be making an investment, not simply that it’s under consideration. There was an attempt to make consideration the standard, but it was beaten back as impractically vague.
The chief investment officer has ultimate decision making power to approve or reject trades. If he wanted his firm to invest in VMWare, it was going to happen.
The stock purchase occurred in 2015. Hoeft wasn't CIO until 2021 it seems:
https://www.dodgeandcox.com/financial-professional/us/en/new...
He also does not have ultimate decision making power. The article notes that all decisions by their investment committee were a group vote.
I have a Wealthfront account with quite a bit of money in it, and I deposit over 50% of my paycheck every week.
I sometimes look at how they’re investing the money on deposit. They often buy the same ticker at (radically) different prices.
The honest excuse is they spread the purchase throughout the day or at different times in the day.
But I’ve always had this suspicion that they might be doing something to boost their profits. I have zero proof or otherwise and don’t intend to defame them in any way.
But the reason I’m writing this is simply to share that there are a lot of businesses where the client really puts a ton of trust in the vendor. An insane amount of trust (literally your life savings) with very little assurances in return.
Without swift and strict enforcement of consumer protections and regulations, these sort of things will keep happening because it’s easy to steal from places where no one is looking.
Just CTRL-F for Citadel in any of their agreements.
Guaranteed someone is paying to front run for them.
I have a family acquaintance who works at a fairly prominent hft shop in nyc. He's rather circumspect when I ask him about details of his job, which doesn't directly relate to trading but I get the impression he has to know quite a bit about how the various trade plans work, since he is deeply involved in maintaining the highly bespoke infra they run on.
After a few beers he'll sometimes start bringing up "customers purchasing order flow" from them, which apparently accounts for a significant part of their revenue. He's also indicated that this is not a practice unique to their shop but is fairly commonplace among companies that have highly advantageous (next-building or same-floor/dc equivalent latency) transport to various exchanges.
I assume, but am hesitant to ask directly, that this activity cannot actually be what it sounds like, but now I don't know.
Payment for order flow is why we have commision free trading. So basically all brokers have these deals.
The SEC announced plans to end it, but my guess is they will be bought off so only the most powerful can participate.
Citadel and Jane Street are basically at either end off almost every trade making billions off fractions of pennies.
Since front-running is strictly prohibited,
“There is no evidence that he engaged in front-running or any other improper trading activity,” Dodge & Cox said.
After the dude clearly engaged in front-running.
Seriously.
This is the textbook definition of front-running, or at the very least, a blatant display of insider trading.
> Imagine essentially that just before a well-informed high roller puts down a large bet on a particular horse, which has the effect of making the odds for betting on that horse less favorable, someone who works for the high roller slips in and makes their own bet on the same horse.
what? horse betting is parimutuel. the timing of your bet does not change your realized odds.
A quick Google search says otherwise. (Although I’ve been to horse tracks, Saratoga, and have bet on horses, and don’t recall the payouts changing, so maybe this is a bad source…)
> Horse racing uses a pari-mutuel system. There's a pool of money wagered, the track takes a cut and the rest is distributed to the winning bettors. But that system means you don't know what the final odds will be when you make your bet —because they are constantly changing until the race begins.
Your quote backs up what OP said. In pari-mutuel betting the odds are decided all at once after betting has closed, hence your timing doesn't change the odds you get.
This is in contrast with fixed odds betting against the bookie where they'd adjust the odds as bets came in to hedge their position. That is no longer common.
The benefits of front-running usually tend to be very transient. Placing a trade just before a large order, as opposed to after, will give you a short-term pop.
The way to make money when front-running is to buy early, wait for the pop, then sell immediately. The longer you hold on, the less of an impact that pop will have on your gains. Company fundamentals and market forces will overwhelm any short-term pop in the long run. Especially so for highly liquid stocks like VMWare where the decisions made by individual funds have a smaller impact on the stock price.
I'm saying all this because the guy was buying and holding for many years. He held on to VMWare for 4 years. And NetApp for over 2 years. At those timescales, the vast majority of your returns are independent of your decision to front-run the trade.
It does seem very coincidental that he bought and sold just before/during his fund's trades. But consider another possibility. He does a lot of active trading - the article mentions that most of his trades are unrelated to his fund's trades. On one of those occasions, he thought VMWare was a good buy, and so, bought the stock for himself. He's also on the fund's investment committee, where his job is to help the fund make good investment decisions. Unsurprisingly, he pitched VMWare as a good buy... because that's what he genuinely believes. The committee agreed with him, and bought the stock.
4 years go by, and he thinks VMWare is no longer a good stock to hold. Hence, he sells his holdings. As part of the fund's investment committee, he also expresses his genuine belief that holding VMWare would not be a good decision at this time. The committee agrees with him, and decides to sell the fund's VMWare holdings. All of the above seems extremely plausible and above-board.
I don't know the exact details of the case, so I'm not claiming the guy is innocent. But the information given in the article isn't as damning as it's presented to be. I'm just glad we have a criminal justice system to try cases like these, as opposed to a media witch-hunt
> But a massive assemblage of confidential stock trading data obtained by ProPublica reveals that the practice may be continuing on a notable scale.
So is my understanding correct that ProPublica has someone’s private financial information that was illegally released to them?
I understand that there may be something illegal or unethical here, but I find it weird that organizations like ProPublica or others are given a pass for violating the privacy of others. It’s also strange that social media platforms often censor information under things like policies on hacked materials or non public information, but only selectively enforce it - perhaps depending on the political implications.
> In a statement, Dodge & Cox said that the firm had given advance approval for all of the trades identified by ProPublica, and a review of Hoeft’s trades after ProPublica asked about them found none violated the firm’s policies.
OK so these trades were submitted for review and approval ahead of time, which is pretty standard, and seems completely unlike some hidden scheme. Is this really front running or just people acting on reasonable information available to everyone about these securities?
This was a really lengthy article and in the end the actual evidence for some criminal activity is flimsy.
> I understand that there may be something illegal or unethical here, but I find it weird that organizations like ProPublica or others are given a pass for violating the privacy of others.
Journalism depends on getting access to private information, there's nothing new in that.
If not you could just shield against journalistic investigations by declaring all relevant information as private.
It's the job of a journalist to be responsible when using its sources, how to disclose the information, etc. but having access to it is a foundational aspect of investigative journalism...