The Financial Services Authority (FSA) has banned and fined a senior trader employed on Morgan Stanley’s London trading floor for “deliberately disadvantaging his customers by ‘pre-hedging’ trades without their consent”.
Having been found to have pre-hedged client trades on seven occasions between June and October 2007, Nilesh Shroff has been prohibited from performing any regulated function and has been fined £140,000.
The FSA defines ‘pre-hedging’ as trading by a broker for his firm’s benefit in advance of carrying out a trade for his customer, using information provided by that customer, a practice analogous to front-running.
According to an FSA statement, where customers instructed Shroff to buy particular stocks, he bought those stocks for Morgan Stanley first, causing the price to increase before he executed the customers’ trades.
Where the customer order instructed Shroff to sell, he first sold on behalf of the firm, decreasing the price. The practice is expressly prohibited by the FSA and Morgan Stanley’s own policies.
Shroff’s job title was executive director, risk-trading programme and the stocks pre-hedged by Shroff formed part of programme trades he was instructed to carry out on behalf of clients.
“As an experienced trader, Shroff would also have known that his orders were likely to disadvantage his clients.
The FSA will take action against those who act without honesty and integrity and who do not follow our rules,” said Margaret Cole, the FSA’s director of enforcement.
Shroff agreed to settle at an early stage of the investigation and therefore qualified for a reduction in penalty. Following its own investigation, Morgan Stanley dismissed Shroff for gross misconduct on 28 December 2007.
The FSA said Shroff was solely responsible for the breach of regulations and that no criticism was extended to Morgan Stanley or other individuals employed by the firm.
The UK regulator also fined and banned David Redmond, a former Morgan Stanley trader, for hiding trading positions from senior management, last week.