Bear Stearns Platform Could Be Market Timers' Mecca

February 24, 2004 ( - Bear Stearns may become a victim of its own success because of the speed with which it can process mutual fund trades.

Because Bear Stearns was able to process fund trades within a day rather than the standard three days, regulators say its platform represented a market-timer’s dream, according to

In an enforcement against PIMCO mutual funds, New Jersey regulators said the Bear Stearns platform was particularly “advantageous for market-timers”  (See  PIMCO Hit with Garden State Trading Suit ). Not only that, but the US Securities and Exchange Commission (SEC) has been questioning people about Bear Stearns’ role in clearing trades for a number of small brokerage firms that may have permitted hedge funds to engage in improper fund trading, according to

Bear Stearns, which boasts one of the largest trade-clearing operations on Wall Street, wasn’t charged in the New Jersey PIMCO action.

The key issue for SEC and New York federal prosecutors is finding out whether Bear Stearns was aware that some investors could have used the platform to make improper trades. In particular, regulators want to know whether the Bear Stearns officials knew some brokers might have used deceptive measures — such as multiple accounts and false identities — to help their clients market time.

Bear Stearns, however, faces a harder time grappling with another trading issue the SEC and prosecutors are looking into, which is whether the platform enabled some hedge funds to engage in late trading. The continuing federal/state fund trading probe has focused on market timing and late trading.

A number of officials with brokerages that cleared trades through Bear Stearns told that the firm’s trading platform accepted trades up until 6 p.m. and, in some cases, even later. These sources said any after-hour trades were supposed to be processed at the 4 p.m. closing price, but that the platform lent itself to abuse by late traders.

A suit filed last November against Bear Stearns has alleged that the firm knew its clearing customers were misusing the mutual fund trading platform to engage in late trading. Bear Stearns, the lawsuit contends “generated substantial revenues and profits from participating in the illegal conduct.” Bear Stearns has denied the allegations.