BMO Nesbitt Burns Inc. engaged in front running in connection with a series of hedging trades in government bonds and related derivatives, the disciplinary committee of the Bourse de Montréal (MX) found.
After a hearing into allegations brought by the exchange’s regulatory division, a panel found that the firm violated several rules including that it traded ahead of a client’s orders on a couple of occasions in 2019, failed to achieve best execution for those trades, and breached its trade supervision obligations.
According to the committee’s decision, a former BMO Nesbitt Burns trader — a fixed-income prop trader and market maker, who retired in 2023 — was also found guilty of front running for taking “advantage of a customer’s order by trading ahead of it” and engaging in transactions based “on non-public information concerning pending transactions.”
The breaches involved hedging trades in bond futures on behalf of the firm’s own accounts that were executed with knowledge of planned trading by an institutional investor client in those same instruments.
According to the committee’s decision, the firm and the trader argued that “hedging prior to posting the client’s order is a legitimate way of facilitating that order and assuming risk from the client and that, in doing so, they did not ‘take advantage’ of the client.”
However, the committee rejected that argument, finding that the firm breached the exchange’s rules against front running.
Among other things, it concluded that the “respondents did ‘take advantage’ of the client’s orders on March 19 and May 31, 2019 by trading ahead of them for [the firm’s] own benefit, as it did not pass on the benefits of the impugned trades to the client.”
Additionally, given the findings that the firm engaged in front running, it found that it failed to establish an adequate surveillance and supervisory system to ensure compliance with the exchange’s rules.
“… it follows that [the firm] must be found guilty of failing to ensure that its employees and approved persons complied with the rules,” the decision said.
The firm was acquitted of an allegation that it failed to mark orders properly when entering them into the trading system.
A future hearing will determine any sanctions to be imposed in the case.