From New York Magazine: There is a certain art to the
practice, common on Wall Street, of getting away with an ethically sketchy
activity that, while perhaps technically not against the law, would look
horrible if exposed to public view.
One of the rules about finding a new way to front-run the
market, for example, is that you don't just come out and say, "This thing
that we're doing will let us gather non-public information and then front-run
the market. Nifty, isn't it?" Especially not in writing. Especially,
especially not if that writing could make its way into the hands of New York
Times reporter/columnist Gretchen Morgenson.
That, of course, is exactly what happened to two hedge funds
owned by the investment giant BlackRock. The BlackRock hedge funds, as well as other firms –
including British hedge fund Marshall Wace and Two Sigma Investments, a
U.S.-based firm – came up with a practice whereby they would circulate
questionnaires to brokerage analysts who covered certain stocks, and whose
opinions often moved the prices of those stocks when made public, Morgenson
reports. The questionnaires, which were filled out weeks or months before the
analysts went public with their recommendations, asked them questions like
"This company you cover, how do you feel about their profits?" and
"What are the chances they'll be bought out?"
The hedge funds would read between the lines of the
analysts' answers, then trade on that close-reading. This little informational
head start is known as a "front-run…..,"
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