The Unpublished Permit and the Large Buy Order
You are head of dealing at a Tehran brokerage. At 10:05 the research department circulates an internal draft report that raises its target price for a listed cement company by 30%, citing a plant-expansion permit that has not yet been announced. At 10:15 an institutional client places a buy order for 8 million shares, about 15% of the free float; the stock trades at IRR 3,200 with a ±5% daily limit and average daily volume of 1.2 million shares. A junior dealer who saw the draft tells the client "now is a good time," and the client asks you to execute aggressively before noon. Compliance is in a meeting. Your desk has six dealers, and the order would be visible in the queue. What controls should you apply before accepting or executing the order, and how should you handle the junior dealer and the client relationship?
1. Identify the legal and ethical issues raised by the draft report, the junior dealer's remark, and the client's instruction.
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The draft report and the unannounced permit are potentially inside information: they are non-public, specific, and price-sensitive. The junior dealer's remark is a selective disclosure and may amount to tipping. The client's order may now be tainted because the client was told that "now is a good time" by someone with access to the draft. The firm must maintain a Chinese wall between research and dealing, and must not deal or assist a client to deal on inside information. Best execution does not require immediate execution when the order is surrounded by a possible market-abuse issue. The dealing desk should not simply execute aggressively and should not explain the real reason to the client. It should preserve the draft, the junior dealer's communications, the order ticket, and the client's instruction, then escalate immediately to compliance or the head of compliance. The junior dealer should be restricted from client contact and market access pending review. The client relationship should be handled by compliance, not by the dealer alone.
2. What execution approach would you authorize, and what records and escalations are required?
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I would suspend execution until compliance has reviewed the matter. If the client can demonstrate an independent, pre-existing trading rationale, and compliance confirms that no inside information has been passed on, the order may be considered. Otherwise, the firm should decline to execute until the permit and the research view are public and the market has had time to absorb the information. If clearance is given, the order should be worked with limits and patient execution, not with an aggressive sweep before noon. Given average daily volume of 1.2 million shares, an 8 million-share order is over six days' volume; a limit order at or below the ±5% ceiling, VWAP-style slicing, and possible iceberg orders would reduce signalling. The desk must document the compliance clearance, the client's instructions, the execution strategy, and any deviation. The junior dealer's access and communications should be reviewed, and the incident should be recorded in the firm's market-conduct log. A suspicious-transaction report is not the primary issue here, but the compliance report and possible regulatory notification should be considered by the compliance officer.
3. If the information becomes public and the client still wants the full position, how should the desk balance best execution against market impact?
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Once the information is public, the order is no longer an inside-information problem, but market impact remains. Best execution considers price, speed, likelihood of execution, and the client's explicit need, not merely the fastest fill. A single 8 million-share order in a stock with 1.2 million shares of daily volume would likely push the price to the ±5% ceiling and leave the client with a poor average price. The desk should tell the client that a full same-day fill is unrealistic without severe impact, and propose a schedule: for example, a limited opening-auction participation, then limit orders in the continuous session, with a maximum participation rate such as 20–25% of volume. The client's "aggressive before noon" instruction should be renegotiated in writing. If the client insists on speed, the desk should document the trade-off and obtain written acknowledgement that price impact is accepted. No dealer should front-run the order or disclose it to other clients.