Cherry-picking and block trading accounts go hand in hand. The most recent firm to be found doing this is North East Asset Management and its principal Greg Zandlo.
According to the SEC order, the firm had block trading account at an unaffiliated brokerage firm. This allowed the firm to place purchase and sale orders for securities in “blocks” that aggregated securities transactions on behalf of multiple client accounts. The problem is that the allocations of those trade would sometimes happen later in the day after the close of the market.
The SEC flexed its data analytics in this case.
“During the Relevant Period, North East Asset Management Group and Zandlo purchased a total of $18,761,004 of equity securities, of which $15,485,058, or 82.54%, were purchase orders executed in North East Asset Management Group’s block trading account and subsequently allocated to the Favored and Unfavored Accounts. The win rate, which refers to the percentage of dollars traded that saw a positive return at the end of trading day, and the day-one profit rate for those trades demonstrate the disparity between the Favored Accounts and the Unfavored Accounts during the Relevant Period. The Favored Accounts had a 91.6% win rate and a 2.47% profit rate resulting in profits of approximately $105,820. The Unfavored Accounts had a 31.3% win rate and a profit rate of -1.01% resulting in losses of approximately $112,667.”
91.6% win rate for favored accounts and only a 31.3% win rate for unfavored accounts. Tough to reconcile that as anything but cherry-picking. The brokerage firm picked up on this behavior. It disabled the block trading access and terminated services. This presumably stopped the bad behavior. The SEC imposed an industry ban on Mr. Zandlo. That should also stop the bad behavior.
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