September 16, 2019

Economix Blog: Front-Running the Release of Market Data

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

Today’s Economist

Perspectives from expert contributors.

A few weeks ago on my blog I saluted Eamon Javers of CNBC for his reporting about some traders who either seemed to be or admittedly were getting an early look at market-moving data.  Well, there have been some new developments.

As The New York Times reports, Attorney General Eric Schneiderman of New York is taking a close look at the practice to gauge the extent to which it creates unfair advantages for some traders.

I tend to think there are two types of early lookers (i.e., traders who get market-moving data anywhere from a few minutes to a few milliseconds before everyone else), though the article suggests that even these lines are blurred.

One type is a private service, as with the Michigan confidence survey, that releases the data to subscribers a few minutes early. Then there are the flash traders with fat data pipes, or as the article notes, servers that “co-locate” near the data-release servers.  All their algorithms need is a millisecond to make some fast — and I’m talkin’ fast — money.

The latter seems wrong in the sense that the data releases are set to come out at a given time but the flashers have found a way to beat the system — call it technological arbitrage.  The former case — privileged subscribers — seems legal but also wrong, though perhaps only in the sense that traders incorrectly believe there is untapped market value once the data are broadly released.   In fact, that value has been picked over by the early birds.

I’m not a lawyer — though Mr. Schneiderman is a uniquely able, just and ethical member of that trade — but none of this looks like a legal slam dunk to me.  The advantaged traders will surely cry foul, saying they have paid good money to get the goods before the rest of us suckers.  I’ll let the attorney general deal with them.

But until this is fixed, here’s the most important thing. Traders need to know the precise vintage of the information they are looking at. The fact that some are getting it before others is itself valuable knowledge. When this broke, a lot of folks claimed, “Oh, everybody knows that.” But everybody didn’t. So it is important to continue to pursue reporting that exposes such advantages.

And the other important thing is: Really? Millisecond trading advantages are helping our capital markets allocate excess savings more productively? This stuff is mostly froth and millisecond price arbitrage, and I say slow it down with a financial transaction tax (a small tax on trades). It would probably take a tax of just a few basis points to make things right.

Article source: http://economix.blogs.nytimes.com/2013/07/09/front-running-the-release-of-market-data/?partner=rss&emc=rss

DealBook: A FrontPoint Founder Tries Again With a New Firm

When FrontPoint Partners began in 2000, its founders envisioned the firm as a one-stop shop for multiple hedge funds, a distinctive strategy in an industry dominated at the time by single star managers.

As FrontPoint fights to stay alive after an insider trading scandal, one of its co-founders, Philip Duff, who left in 2006, sits in a nondescript office less than a mile away from his former firm rethinking the pension business with his latest venture, Massif Partners.

It is his second attempt.

After Mr. Duff helped to orchestrate the sale of FrontPoint to Morgan Stanley in 2006, he struck out on his own, starting Duff Capital Advisors. As with FrontPoint, he tried to identify an untapped market, in this case state and local pension funds struggling to meet their obligations.

He had grand ambitions. Seeded with $500 million to build the business from the private equity firm Lindsay Goldberg, Mr. Duff leased offices in a high-end building in Greenwich, Conn. He loaded the offices with bells and whistles, including a new skylight with automatic tinting to reduce heat and glare.

Duff Capital offered pension and endowment funds a comprehensive group of services, including advice, risk management and a variety of investment options like hedge funds and private equity portfolios. At the time, Mr. Duff boasted that the firm had the potential to be larger than many of the world’s top hedge funds, saying it was in talks to receive as much as $1.5 billion in seed capital to invest.

“Next-generation solutions are needed, and we believe a new approach is required to meet those needs,” Mr. Duff said, in an announcement heralding the new venture.

But the timing was bad.

The firm started in March 2008, just months before the collapse of Lehman Brothers and the onset of the financial crisis. With the markets in disarray, clients never materialized and Duff Capital shut down in May 2009. The firm never moved into its plush offices.

Now, Mr. Duff, a former top executive at Morgan Stanley, is trying again. His new firm, Massif Partners — which like FrontPoint has a name that refers to his passion for mountain climbing — is building off the blueprint of Duff Capital and focusing on pensions. A spokesman for Mr. Duff declined to comment.

If anything, the institutional investors are in worse shape. A recent study of 126 state and local pensions funds found that they had just 77 cents for every $1 of obligations. That is down 2 percent from 2009 and the lowest level since the mid-90s, according to the report by the Boston College Center for Retirement Research.

Typically, the institutional investors take an à la carte approach to building a comprehensive portfolio, getting risk analytics, investment advice and fund options from a variety of providers. Massif is trying to streamline the investment process for pensions, giving them access to several services through one firm, according to a person with knowledge of the situation who declined to speak publicly.

While it is a growing industry, the field is competitive, said Stewart Massey, co-founder of Massey Quick, a consulting and wealth management firm. Mr. Duff has raised just $4.5 million from 10 investors, according to a regulatory filing in January.

“Unless you have that cornerstone investor, it’s a very tough business to build,” Mr. Massey said.

Mr. Duff began his career as a grain trader at Louis Dreyfus in the late 1970s, leaving in 1982 to attend business school at the Massachusetts Institute of Technology. During the summer, he worked as an associate at Morgan Stanley in the mergers and acquisitions group.

After graduation, he joined the financial institutions group at Morgan Stanley during a period of rapid consolidation in the banking industry. He quickly rose through the ranks, becoming the chief financial officer under John J. Mack in 1994. Mr. Duff was 34.

A few years later, he jumped from investment banking to asset management, becoming chief operating officer at Tiger Management, the hedge fund founded by the legendary investor Julian Robertson. When Mr. Robertson closed his fund to outside investors in 2000, Mr. Duff left.

Late that year, Mr. Duff, Gil Caffray, the former head trader at Tiger, and Paul Ghaffari, a manager for George Soros, decided to start FrontPoint. Mr. Duff named the firm after a technique used to climb ice.

After five years, the team was managing more than $5 billion, thanks in part to its diversified model. FrontPoint brought several independent managers in house, providing back-office support and risk controls for the group. As assets swelled, the firm caught the eye of Mr. Duff’s former employer, Morgan Stanley, which took an ownership stake for $400 million in late 2006. Shortly thereafter, Mr. Duff left FrontPoint.

Last year, the multimanager model that had served the firm so well suddenly became a liability. In early November, the government arrested a French doctor on suspicion of leaking insider tips about a drug trial to a hedge fund portfolio manager, later revealed to be an employee of FrontPoint. Joseph F. Skowron, the employee, was charged with insider trading last month while the doctor, Yves Benhamou, pleaded guilty in the case.

While neither FrontPoint nor any other managers were accused of wrongdoing, the entire firm suffered. Investors pulled more than $3 billion from the main fund, and earlier this month FrontPoint announced that it was shutting down most of its funds.

Some say that the problems at FrontPoint and Duff Capital could make it difficult for Massif to attract clients.

“In any situation, your most important asset is your judgment, and that’s especially true on Wall Street,” said Steven Seiden, a founder of Seiden Krieger Associates, an executive search firm.

“If it’s a blatant lapse of judgment that caused this, then it could be very difficult,” he said of the collapse of Duff Capital. “If it’s part of everyone who got swept up in the financial maelstrom, then that’s a different story.”

Mr. Duff has not begun marketing in earnest and does not expect to start investing until early 2012, according to people who have been briefed on his plans. For now, he is focused on developing Massif, which in climbing parlance refers to a cluster of mountain peaks. Along with veterans from FrontPoint and Duff Capital, he is in talks to hire FrontPoint staff, as that business winds down its main fund.

He has also traded the grandeur of Duff Capital for the more modest Massif. He’s downsized from the more than 40,000-square-foot offices for Duff Capital to a featureless space with warm, blond wood accents. The Massif office, in the retail corridor of Greenwich, is one floor up from Giggle, a store that sells clothing, furniture, books, toys and other items for babies.

Article source: http://feeds.nytimes.com/click.phdo?i=846e369d0ed7872672b4ad5558963b68