SEC Scrutinizes Algorithmic Traders
Algorithmic traders and quant funds are under close scrutiny from a U.S. Securities and Exchange Commission enforcement team responsible for policing hedge funds, the unit’s co-chief said at securities law forum.
The SEC is “very much focused” on possible misconduct by traders who primarily use computer models to execute investment strategies, and more cases in those areas are likely, Bruce Karpati said today during a Practising Law Institute panel discussion in New York. Investigators are zeroing in on firms with “aberrational performance,” he said, without giving details on practices that are under scrutiny.
The February case in which Karpati’s asset-management team accused Axa Rosenberg Group LLC of causing $217 million in customer losses by concealing a coding error was “wake-up a call for all quant managers” to be fully forthcoming about the risks of their strategies, he said at the time. Axa paid $242 million to resolve the claims.
In his remarks today, Karpati said his team is also looking at how hedge funds value illiquid assets and whether some investment managers have used so-called side pockets to hide underperforming assets. Side pockets are accounts used by hedge funds to separate less-liquid investments from others.
The SEC will likely bring more cases against hedge funds that engaged in preferential redemption, where the owners of the firm or selected investors are able to liquidate their investments before other clients, Karpati said.
The agency is using powers granted by the Dodd-Frank Act to bring enforcement actions against unregulated entities and seek expanded sanctions in administrative cases, he said.
More cases will probably be brought as administrative proceedings, which are heard by judges at the SEC, instead of pursuing claims in federal court, Karpati said. The agency may pursue more claims against people who have been negligently responsible for misconduct, to capture a wider range of actors than those who knowingly participated in a fraud, he said.
“This is really the result of getting enhanced authority to pursue wrongdoing,” he said.
To contact the reporter on this story: Joshua Gallu in Washington at jgallu@bloomberg.net
To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net
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