You are right about front running, which is illegal. The stories I linked to in first post don't say this, but the previous ones by NY Post do mention this (though they "tactfully" don't call it front running).
In the thread I Knew Bernie Madoff Was Cheating--That's Why I Invested with Him , my post #8 cites the link to NYP article MADOFF'S STRATEGY WAS JUST TOO GOOD TO BE TRUE.
From that article: Madoff used what's called a "split-strike conversion" investment strategy, in which Madoff's firm bought a basket of stocks found in the Standard & Poor's 500 index.
The strategy tied nicely with Madoff's main business of making markets in S&P 500 stocks and benefiting from the "bid" and "ask" - essentially the highest price a buyer will pay for a stock and the lowest price at which a seller is willing to part with a stock.
In simple terms, Madoff's split-strike trade consisted of buying S&P 500 stocks and selling a "call" option above the price of the market and buying a "put" option at the price of the S&P 500 index. The trade, also known as a "collar," is meant to limit any swings in price.
For Madoff, the strategy essentially would have captured any money made on the bid-ask spread, said Jon Najarian options expert and co-founder of OptionMonster.
Najarian estimates that at best Madoff would have generated 5 percent or 6 percent annual returns. Factoring in the costs associated with the strategy, Madoff likely broke even at best.
That's a polite way to describe front running by a market maker or a specialist. They didn't pay mucho money for a seat on the exchange, did they? When exchanges went to a penny spread, MMs profitability took a big hit.
In the end, Bernie had to fold because he couldn't survive his investors' calls asking for redemptions from fund, i.e. the "run on Madoff bank".
Bingo! Bernie was front running and his poor clients probably knew it and thought it was a slam dunk. The Najarian brothers are pretty sharp in options.
I wonder if Bernie’s front running scam was working pre-decimalization when you could drive a truck through the spreads. When it went to 1 or 2 penny spreads - the strategy did not work. His transaction costs were probably close to zero. If he could generate 4 to 5% returns - it may have been how he could have been able to run the scam so long. It probably could have gone on for decades.
The hilarious part is his donations to Dems did him in. Obamabi and his CRA lawsuits to force Citi to make bad loans followed by his Alinsky moles at Fannie & Freddie spreading the virus caused this nightmare. He funded people who blew up the financial system which caused mega redemptions and for his scam to be exposed.
PS: There is no freaking way his kids and others were not in on this. Too many checks coming in and going out, trade confirms, bookkeeping etc etc.
His whole family were in on this.