Well in this case those traders would KNOW when and at which price the algos trading the client accounts would get into the positions at, that's material non-public information and took advantage of that to get into the positions ahead of the client funds. That's front-running. Same as some dubious brokers, knowing where their clients' orders are and get into the positions first before executing the clients' orders. That's front-running.
It's not and no, the traders (PMs) did not know which trades will be shadowed by the algo. It's a separate team that is running this strategy and the PMs in the prop pool are not aware of the trades (you can see why, right?). It's not front-running, however the fact that they did not disclose to the investors that they are getting alpha capture instead of the actual strategy is pretty fucking infuriating.
From sec website. Covers this exactly. Buying for own account before buying for customers. https://www.sec.gov/rules/other/f4-...n portfolio,same securities for their clients.
This is not an SEC rulebook, but is an opinion presented by a consultant way back in 2000. The definition in the FINRA rule book specifically states that you have to have advance knowledge of the upcoming transactions. Otherwise, everyone who's recommending a trade to their aunt will be guilting of front running her (I am including the rule on trading ahead, which is a form of front running for completeness): https://www.finra.org/rules-guidance/rulebooks/finra-rules/5270 https://www.finra.org/rules-guidance/rulebooks/finra-rules/5320 As I said, the portfolio managers in case of alpha capture are not the same ones that are buying securities initially. The PMs who are being followed are not aware of that activity and if they do suspect it, they don't know which exact trades will be replicated. Properly disclosed, alpha capture is perfectly legal. Of course, it's very shady with regard to the PMs for various reasons.
From what I see, there are two criterias to determine whether the behaviour qualifies as front-running or not according to the rulebook. 1) It has to be known in advance and 2) the transaction has to be upcoming. In Bluecrest's scenario, considering the fact that they designed the algo themselves to copy aka follow the trades after the trades were done by the top traders first and implemented in the clients' fund portfolio ensured that their action met both criteria. First, they KNOW in advance for sure that the algo will be copying their trades of the top traders because it's themselves who implemented in the clients' portfolio. If they had just designed the algo and not chose to implement it at all or run it in any way then yes you can say there is no way to know in advance whether the copying trades would happen or not. But the fact that they implemented in the clients' fund and specifically had it trade the client funds portfolio means they know in advance that copied trades at less favourable price WILL happen in the clients' portfolio and it will happen later than the top traders' trades for the internal funds which lead to the satisfaction of the second criteria that the trades are upcoming. Since they designed the algo to always COPY the trades of the top traders, it ensures that the trades done by the clients' portfolio will be always later than that of the top human traders that it's always "upcoming". You can't copy something that hasn't happened yet. If they had designed the algo to sometimes be able to independently analyze the market and make trading decisions on its own, then you can say the transactions may not always be "upcoming" because there could be a chance that the algo's trades might be before that of the top traders. But that's not the case, they specifically designed the algo to only copy the trades done by the human traders aka the top traders then the algo's trades will always be AFTER that of the top traders so the trades done by the algo for the clients' portfolio are always upcoming simply by the design of the algo. It doesn't matter which team runs which portfolio. That's just the logistics of it. The fact that the algo is designed to always copy the trades after the human traders determine when the algo trades happen and that is always upcoming, after the trades of the human traders. So Bluecrest was not only just guilty of not disclosing the management details of the clients' portfolio, they were indeed frontrunning their clients because they had perfect advance knowledge of upcoming transactions that would happen in the clients' portfolio, satisfying both criterias for front-running in the FINRA rulebook. I am just surprised that the regulators didn't charge Bluecrest on that also. Alpha capture was of course the result of them front-running their clients. Without them front-running the clients, how could they have captured alpha? In the trading ahead of your aunt after recommending a stock to her scenario, it's different because your aunt may or may not trade the stock even though you recommended the stock to her because your aunt is an independent person and is well capable of independent thinking and action. Unless you pointed a gun to your aunt's head and forced her to trade the stock later after you traded the stock first, it's not a case of front-running because you do not have the advanced knowledge for certain that your aunt's transaction will be upcoming, not satisfying either of the criterias to qualify as front-running in the rulebook.