Levine on Wall Street: Wash Trades, Spoofing, and Themed Cabanas

There’s this Finra complaint againstWedbushSecurities “for systemic supervisory and anti-money laundering (AML) violations in connection with providing direct market access and sponsored access to broker-dealers and non-registered market participants.” The claim is basically that if you were an evil high-frequency trader who wanted to do evil high-frequency trader things — “potentially manipulative wash trades, and other potentially manipulative trading activity, such as layering and spoofing” — then you could go toWedbushand they’d set you up with market access, no questions asked. And Finra claims to have found “over 100,000 instances of potential layering, spoofing and auto-execution manipulation” by Wedbush’s high-frequency trading clients. According to Finra,Wedbushignored red flags and “delegated virtually all reviews of post-trade activity for potentially manipulative wash trades by market access customers to one poorly-trained, unlicensed employee who, in turn, was charged with training another compliance analyst.” So I guess the answer to the question “do layering and spoofing actually happen?” is, sure, yes. Elsewhere in high-frequency trading, Imperial College Business School in London wants to teach more high-frequency trading. And elsewhere in control flaws, Deutsche Bank hired not one but two new information technology executives after the Fed yelled at it for “low quality, inaccurate and unreliable” regulatory reporting.

Today in insider trading.

Should the artist formerly known as SAC Capital be liable for insider trading on stuff it didn’t know about? Basically, it got some bad news about a company called Elan, sold the stock, and the stock went down when the bad news was revealed. And then other bad news — that SAC never knew about — got revealed, and the stock went down further. And the courts may make SAC pay investors for their losses on that other bad news, because the law is weird. Speaking of which, given Allergan’s insider-trading lawsuit against Bill Ackman, should regulators “adopt a rule to expand the prohibition on insider trading to reach trading like Mr. Ackmans”? I vote no, but you knew that. The point is that people — even Allergan’s lawyers! — want to expand the laws to cover Ackman’s conduct, which suggests that Ackman’s conduct was probably legal.

Today in feuding billionaires.

Here is the story of the “battle over Clifton Bay, a postcard-perfect patch of turquoise waters off the western coast of the Bahamas” that has been “made famous by James Bond movies.” The battle is between Louis Bacon, founder of hedge fund Moore Capital Management, and Peter Nygard, a clothing manufacturer. They are neighbors there, and seem not to be fond of each other, possibly because

Mr Nygard has constructed a Robinson Crusoe playground with volcanic, smoking Mayan temples, a disco club and 20 themed cabanas where he has hosted celebrities.

Elsewhere Ron Perelman is suing Larry Gagosian over alleged art-market manipulation. And while Bill Ackman and Carl Icahn disagree on Herbalife, the “largest total stock investment by hedge funds is in Icahn holding-company Icahn Enterprises, followed by Allergan, a large position for Ackman,” so I guess they both remain popular with their peers. And here’s something about an advisory committee asking the United Nations Human Rights Council to condemn “vulture funds.”

Jana Partners got something in the mail.

Okay first of all this article starts with just a great photograph, don’t miss it. Second: Jana Partners sent a letter to PetSmart, in which it’s a 9.8 percent shareholder, saying that it had “received in the mail an anonymous, unsolicited package” containing internal PetSmart business plans and a note criticizing PetSmart for missing internal projections and doing things that are not “in the long-term best interests of shareholders.” It’s sort of a strange story, and you get the sense that Jana felt compelled to send PetSmart the documents and disclose their existence, rather than this being, like, part of the plan. Still I guess if you’re the anonymous PetSmart critic you more or less got what you wanted: Your complaints have been aired publicly and Jana, the activist pushing for change at PetSmart, has more ammunition to do so.

Is active management good?

Here is an entertainingly precise paper about hedge funds:

Using raw returns as a measure of performance, it is found that more active funds outperform the less active ones. However, when risk adjusted returns are used to measure performance, we find the opposite results; that is, activeness is inversely related to returns. Still, we find that a few very active managers outperform the moderately active funds and generate higher returns. We conclude that the most active managers use their skills to manage the riskiness of their portfolios and are, therefore, able to provide higher risk adjusted returns. Finally, we find that compared to the least active managers, the most active managers are less homogeneous and, therefore, due diligence is far more important when selecting an active manager.

This is pretty consistent with naive expectations: Most of the time, whether you’re a hedge fund manager or a retail schlub, the more you trade the riskier your trading will be. (The raw-return outperformance for more active funds is a bit of a surprise but suggests that there’s some depth of skill at hedge funds.) But some people are actually good at trading (or coin flips, whatever) and so generate high risk-adjusted returns even though they trade a lot. Elsewhere, has creative destruction become more destructive? (This is partly a theory of the app economy.)

Things happen.

Matt Klein at FT Alphaville on money, wholesale funding, and bankruptcy safe harbors. How’s the housing market in Phoenix? At this point stories about Preet Bharara are pretty much entirely about how publicity-seeking Preet Bharara is. Tom Montag is consolidating power at Bank of America. “To mark the Aug. 19 anniversary of its IPO, I sifted back through those words, looking for clues to what has made Google the company it is today.” Children are expensive. An app to rate the police. The Loeb Classical Library is online.