Pittsburgh Post-Gazette – In late 2002, the manager of Marshall Wace LLP, a large London hedge-fund firm, received two important phone calls from an investment bank that was about to unveil aclient’s offering of securities.
Such an offering would be of keen interest to investors. It could be expected to hurt the stock of the issuing company, French telecom giant Alcatel SA. That’s because the securities could dilute existing shareholders’ stakes.
A call from an underwriter before an offering isn’t a heads-up the average investor can expect, but hedge funds can. The private investment pools control so much cash — some $1.2 trillion — and trade so heavily that they can account for up to half of the daily volume on the New York and London stock exchanges. That makes them big sources of commissions for securities firms. The firms, in turn, court the funds by feeding them steady streams of trading ideas and information about stocks, bonds and what other financial-market participants are up to.
For regulators, this constant flow of information stirs concerns about unfair advantages — or worse, possible illegal insider trading. And in the Alcatel case, investigators for a French securities regulator have asserted that Marshall Wace ordered a big sale of Alcatel shares about two minutes before the unveiling of the new securities offering. After the unveiling, the share price fell steeply.
