How Prosecutors Misconstrued OTC Market-Making Practices

Law360 (June 25, 2019, 5:24 PM EDT) -- Recent federal court cases highlight the challenges involved in judging acceptable market-making behavior in over-the-counter markets.[1] In these cases, prosecutors interpreted trader bluster and barter as fraud, customary prehedging of pending OTC block orders as front-running, and self-interested principal trading as a violation of a market maker's inferred duty to a counterparty. 

The standards applied to evaluate market-making behavior, however, should be consistent with established and customary protocols in OTC institutional markets. In these markets, haggling is the norm, prepositioning and forward sales are risk management techniques, and market makers trade for their own accounts to earn a profit by making buys...

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