UK FSA bans ex-M.Stanley trader for front-running

Britain's financial regulator banned and fined a trader on Tuesday for "front-running" client trades, in the third sanction on a former Morgan Stanley banker in the last two weeks.

The Financial Services Authority (FSA) banned Nilesh Shroff for deliberately disadvantaging his customers by "pre-hedging" trades without their consent.

The FSA said Shroff agreed at an early stage to settle, which had reduced his penalty by 60,000 pounds to 140,000 pounds ($222,600).

While a senior trader at Morgan Stanley, the FSA found that Shroff disadvantaged his clients on seven occasions between June and October 2007 by partially pre-hedging programme trades.

The practice, often termed "front running", refers to trading by a broker for his firm's benefit in advance of carrying out a trade for his customer, using information provided by that customer.

Where customers instructed Shroff to buy stocks, he bought those stocks for the firm first, causing the price to increase before he executed the customers' trades.

He knew the action was prohibited by the FSA and Morgan Stanley, the FSA said. The regulator said neither the bank, nor any other individuals, were subject to criticism.

A former Morgan Stanley trader was banned by the FSA last week for building up a big unauthorised oil futures position after drinking alcohol over a long lunch.

And the bank was fined 1.4 million pounds on May 13 for failings that led to a $120 million markdown to the books of a former senior proprietary trader.

Morgan Stanley dismissed Shroff in December 2007.

"Mr. Shroff deliberately and knowingly violated our policy on pre-hedging client trades. We took immediate action to address his misconduct, ultimately dismissing Mr. Shroff," the bank said in a statement.