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.
‘Enforcement 40’ for 2020
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