- Morgan Stanley and Goldman Sachs are two of the financial institutions regulators are probing over block trading, the Wall Street Journal reported.
- The Justice Department is also investigating whether Wall Street banks let hedge funds know about big share sales, the WSJ reported Monday.
- Block trades involve sellers offering large numbers of shares off the open market to some of their institutional clients.
Financial market regulators have opened a probe into Wall Street firms like Morgan Stanley, Goldman Sachs, and various hedge funds over block trading, the Wall Street Journal reported on Monday.
The Securities and Exchange Commission (SEC) and the Justice Department are looking into whether banks gave hedge fund clients advance notice about big share sales before they were made public.
Goldman Sachs declined to comment and Morgan Stanley was not immediately available for comment when contacted directly by Insider.
The SEC sent subpoenas to the firms, seeking trading records and information on communications between investors and the banks, the Journal said. Regulators investigated if the funds benefitted from the banks' share sale alerts.
"The rules governing when and how Wall Street firms can tell clients about coming block trades are murky. In some cases, there are questions around whether divulging certain information or acting on it is improper or illegal, lawyers say," the WSJ said.
"The issuance of subpoenas doesn't mean charges will be brought against any of the firms or individuals whose activities are being scrutinized," the WSJ said.
Block trading refers to the practice of a bank selling a large number of shares as a block. Selling in parts may take longer and can reduce the price, so banks tend to bid for all of them, usually at a discounted price to the market. The successful banks offer these shares to clients at a premium to the agreed price. In this way, banks seek to gain a profit, according to the WSJ report.
Block trading has boomed recently and was at a five-year high of $70 billion last year, the WSJ said, citing data from Dealogic. Morgan Stanley was the biggest player in the market, while Goldman Sachs was also an active player, the Journal said, based on the data.