Friday, November 23, 2012

More deserved scrutiny for SAC

From 2006 to 2009, SAC, the hedge fund run by Steven A. Cohen, found its way into this blog repeatedly.  Maybe it was an obsession based on time spent in the securities industry and even at a mid-level seeing what was the always irritating and borderline ethical behavior of that firm.  Now SAC is moving toward the spotlight of regulatory and media speculation.

Whether Cohen has violated any trading regulations, as in trading on non-public information, is unclear.  The way that his firm is organized could well mean that some under him could have broken laws and he would not have known, or that there is no evidence that he would have known.  SAC is decentralized into groups or even individual mandates.  In the latter case a trader/investor is hired and given a stake to invest.  He/she has oversight, as in others know what he is doing, but he has sole discretion over the buying and selling of investments that he makes.  How does he make those decisions, what are sources of information?  Cohen delegates significant independence.  Bonuses follow good performance.  Pink slips follow weak performance.

SAC is in most cases a short term investor, often very short term.  The culture of the firm is to trade.  They have historically been abetted in this approach by almost all firms on Wall Street.  As perhaps the leading volume provider to many firms, an SAC relationship is nurtured.  With such razor thin commissions on equity trading, a high volume trader like SAC is an almost unique profitable account just on trading alone, no need for derivatives structures or special services to make that happen.  Additionally, big order flow helps Wall Street firms understand the market and have greater liquidity for their other clients.  The SAC relationship is important.

To that end, SAC gets great treatment.  If a Wall Street firm has a conference, has a lunch meeting with executives of a major company, or puts out new research, SAC is there.  In conferences or meetings with management almost solely attended by long term investors, SAC is invited.  When new research reports are released pre-opening, a firm's salesperson covering SAC makes sure to call them first, alert them, and at times highlight a short opportunity.

SAC uses this access to "manipulate" short term trading.  It may not be illegal, but they put their own spin on what they hear at investor meetings or in what questions they ask at such meetings.  It's generally always negative, and suggests that perhaps they have set up short positions prior to editorializing in a negative way or asking highly negative rhetorical questions.  They informally team with traders at other hedge funds to spread opinions, read that as rumors, that can move a stock intraday, all that they need for a profitable trade.  That's their m.o.  They hire smart people, put the pressure on, and see if they can cook.

The transaction in question now seems to be a case of obvious trading on non-public information.  It's really too obvious if the news reports are accurate.  This would not characterize SAC's normal behavior.  Theirs is much more circumspect, much more kicking the chalk lines getting their shoes dirty and crossing from time to time, not blatant insider trading as is the case here.  With the pressure that is on the traders, insider trading like this would fall under the don't ask, don't tell mantra.

How this unfolds will be interesting to watch.   


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