How to Gauge SAC on the Richter Scale – NY Times

Adding to the difficulty in unwinding a large portfolio is this fact: When Wall Street firms get a whiff of trouble at a fund whose holdings they know well, they are known to capitalize by front-running — buying and selling in advance of the fund’s forced trades, increasing its losses as it liquidates.

That is precisely what happened when Long-Term Capital Management hit the skids in 1998. Some brokerage firms that held the fund’s securities profited from such front-running after being allowed to pore over its books as regulators fashioned a rescue. These trades exacerbated Long-Term Capital’s losses.

In other words, in a liquidation, Mr. Cohen may learn how loyal, or not, the firms on which he lavished such hefty commissions over the years will be.

via How to Gauge SAC on the Richter Scale – NY Times