Allegations of front-running can occur for a variety of financial instruments, and multiple recent high-profile white collar litigation and regulatory matters involve such allegations.

Front-running refers to the practice in which a dealer with advance, private knowledge of an imminent client order places orders for the dealer’s own account with the intent to impact the price of the security at issue. Pre-hedging, on the other hand, is a legitimate trading strategy and common practice where a dealer takes a hedge position in anticipation of an incoming trade. Front-running and pre-hedging may require careful and detailed analysis to differentiate in practice.
Our experience includes:

  • Providing detailed analysis of client transactions and the associated, often complex, hedging transactions or contemporaneous trading in the market.
  • Analyzing the trading behavior surrounding pricing calls, barrier trigger events, or other key pricing events in connection with execution of hedging strategies.
  • Analyzing timing, pricing, and volume of trading based on order book and transaction-level data across a range of exchanges and trading platforms (voice, hybrid, electronic).
  • Assessing traders’ conduct with electronic communication, risk management reports, or other documentary evidence.
  • Assessing the potential market and value impact of the trading in question.

Select Experience

Interest Rate Derivatives
Cornerstone Research has consulted to broker-dealers facing regulatory investigations of alleged manipulative trading to influence the pricing of complex interest rate derivatives entered in conjunction with large bond issuances. Our analysis involved dissecting the transactions and evaluating the risk the bank takes on when entering into these complex derivatives, determining what trading strategies might be used to hedge the risk, and assessing whether the trading in the relevant markets leading up to and during any pricing calls was consistent with prudent risk management strategies. In connection with the trading data analysis, we have analyzed electronic communications and pricing calls information.

Foreign Exchange
Cornerstone Research has analyzed allegations that traders at a multinational bank’s FX trading desk traded ahead of a large client order. Our analysis involved evaluating bank internal data on the desk’s and individual traders’ profits and losses, assessing transactions in instruments related to the relevant currency, and assessing transactions in relevant related currencies. We assessed the potential market impact of the trades in question by analyzing publicly available order book and transaction data from all relevant FX trading venues.