Using order flow

It is usually the case that if it looks too good to be true, then it probably is....However, in the Madoff case, there was a clear explanation for his reported returns. The FT reports on the explanation that Union Bancaire Privee gave to its clients.

“We were assured that he had some visibility as to the momentum of the markets...due to his significant volume size as a broker/dealer,” the UBP letter said.

“The perceived edge was Madoff’s ability to gather and process market-order flow information and use this information to time the implementation of the split-strike options strategy.”

This is also the base for accusations that were made at Madoff that he was front-running (dealing before a large order that he had on the books).