Unusually large purchases late last week of put options on shares of Nasdaq OMX Group, the company that runs the Nasdaq stock exchange, suggest the possibility of front-running before Michael Lewis' appearance on CBS' "60 Minutes" Sunday, writes
Steven Sears of Barron's.
If front-running indeed occurred, it would be highly ironic given that Lewis, a financial author, charged on the show that the stock market is rigged by high-frequency trading that essentially amounts to front-running.
Some investors purchased approximately 6,000 Nasdaq OMX puts last week, Sears reports. That trading volume was 400 percent larger than normal, according to Trade Alert.
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In addition to Lewis' CBS appearance, the trading looks suspicious in light of Monday's news that the FBI is investigating high-frequency trading.
Investors might choose Nasdaq OMX as a proxy for high-speed trading because it benefits from the practice, Sears explains.
It and others sell "co-location" services that permit high-frequency trading firms to get closer to exchange computers. That enables the firms to receive price information quicker than other investors.
Nasdaq OMX shares rose 0.6 percent Monday, dropped 3.1 percent Tuesday and rebounded 3.4 percent Wednesday.
"The options trading, and stock price action, suggests Nasdaq's stock and options are now viewed by investors as the way to trade the high-frequency trading investigations," Sears writes.
Meanwhile, hedge fund luminary Clifford Asness, managing principal of AQR Capital Management, disputes Lewis' assertion of a rigged stock market.
Individual investors who trade for themselves benefit from high-speed trading, Asness and AQR portfolio manager Michael Mendelson write in
The Wall Street Journal.
"Their small orders are a perfect match for today's narrow bid-offer spread, small average-trade-size market. For the first time in history, Main Street might have it rigged against Wall Street."
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