Traders 'Front-Running' FBI-Raided Firms?

A third hedge fund has had a search warrant executed against it, according to the WSJ: Loch Capital Mgmt, also raided by FBI, a Boston hedge fund — a small fund, $140 million.

Sell on the news: stocks dropped on word the FBI were searching the offices of Diamondback and Level Global, but some stocks dropped more than others. Traders quickly did a search of Diamondback's biggest holdings, and lo and behold--those stocks dropped, including El Paso , Plains Exploration , JPMorgan , Canadian Natural Resources , and PPL .

Why? A cynical, perhaps short-term calculation that any firm that announced it was being raided might see redemptions, which would force it to sell holdings.

Is this a one-day event or a new, longer-term reality? Short term, this will take the starch out of the market more than weak GDP. It's one thing to be paranoid that any person anyone talks to is wearing a wire (unlikely). But if the definition of what is insider trading is being expanded, so that any buyside analyst who has ever talked to anyone in his industry is under suspicion, than the Street has a much bigger problem.

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