Hedge Funds: Hedge Funds Mount Pressure on EU Loophole

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Hedge Funds: Hedge Funds Mount Pressure on EU Loophole

European regulators are attempting to close a loophole that allows front-running.  The London Stock Exchange Group and Euronext NV claim that the EU should instill more restrictions to monitor brokers’ trades on price inquiries from their clients.  However, traders will gain knowledge from a security before any action is taken.  According to John Keogh of Susquehanna International Group, “We believe it is contrary to the market-abuse regulation in Europe…We do not engage in the practice and have asked the regulators to ensure it is explicitly prohibited as it negatively impacts customers and undermines confidence in the market.”  

The brokerage-industry lobby rejects these claims.  Ironically, this shows that buyers and sellers are unable to fully trust their middlemen in the deal process.  According to two lobbying groups, trades that include pre-hedging can lead to front-running — an illegal process of profiting from knowledge gained through clients’ orders.  According to the groups, “Pre-hedging essentially places the proprietary interest of the broker ahead of the de facto client.”  

In the United States, firms are prohibited from placing their interest before their client’s.  This effectively prevents front-running.  A firm must ask for consent from their client if they need to trade information to help execute an order.  

Foreign Exchange

Front-running is currently under scrutiny in the foreign exchange market.  HSBC Holdings agreed to pay $100 million in fines after the U.S. Justice Department charged it for defrauding clients through front-running.  Currency dealers now have a code of conduct following pressure from regulators.  Regulators stopped widespread Front-running issues.  This occurred as many currency dealers backed out of trades, consequently exposing clients’ information.   

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