The US Securities and Exchange Commission (SEC ) and the Justice Department are investigating whether hedge funds were informed in advance prior to large share sales.
The SEC has issued subpoenas to Goldman Sachs, Morgan Stanley and hedge funds. Federal investigators will examine the trading records as well as as the bankers' communication with investors.
It is merely an investigation, and there are no charges at the time of writing.
What are Block Trades?
A block trade is either buying and selling a large amount of securities outside of an exchange . Block trades often take place outside of exchanges to avoid a significant impact on the market. Block trades may be conducted on options, futures or combination transactions. In the stock market, block trades often exceed 10,000 stocks.
Block trades are privately negotiated. Institutional investors can request block quotes in direct bilateral communication involving the broker. Although other stock traders cannot participate in the block trades, it may provide some indication if a substantial amount of stocks are bought or sold.
Investigators are probing whether hedge funds were tipped prior to large sales.
US regulators have been investigating any unusual activities in block trades for approximately 3 years. If a hedge fund is tipped, a large sale will take place prior to being publicly disclosed, and the fund may benefit by shorting the stock.
Prior to a large sale of stocks in block trades, the stock of the companies that were due to be sold weaken before the sale takes place. This leads regulators to suspect that inside information is being passed to hedge funds. It has been reported that some of the hedge funds are liquidity providers to large firms.
Morgan Stanley has been the main focus of the investigation according to these reports. At the time of writing, there is no significant impact on Morgan Stanley stock, and Goldman Sachs is slightly lower.
