Who needs Flash Trading when we have the FX London Close?!

The hotly debated, headline story of the moment is whether some HFT (high-frequency trading) firms are front-running all other U.S. equity investors by paying fees to the exchanges.  Good question .... but let's look at another topic in the news:  allegations of front-running and collusion in the London Close for currency trading in the WM/Reuters index.

Quoting an earlier and detailed Financial Pests account:

"Many banks provide a service to their customers where they guarantee to trade for them at the London Close rates. Customers provide the trade amounts to their banks within the one hour prior to the London Close, also known as “the fix”.  Those banks that have agreed to make transactions for funds at the London Close need to push through the bulk of their trades during this window where possible to minimize losses from market movements."

Instead of several MILLISECONDS of potential front-running, the London Close provides ONE HOUR of potential front-running!

Focusing on the London Close, what strikes us is that there's an easy answer.  First and foremost, it's a risk management issue.  Banks and dealers should not "guarantee to trade for [clients] at the London Close rates."  It's simply not possible to achieve the last price whereas giving a "guarantee" of last price is a difficult-to-quantify risk exposure.  With both this quantification difficulty and the appearance of manipulating markets that arises from trading as much as possible in the final minute, prudent risk management dictates "don't offer the London Close guarantee trade to clients."

As an alternative to banning the London Close trade, permit the pairing of such trades for clients on opposite sides.  Prior to close, the client may commit itself to executing a stated maximum notional at the fix price subject only to the dealer finding a client for the other side.  If confirmed prior to the market close, this trade execution can be posted to the exchange for all participants to see.  If no client materializes for all or part of the stated notional, then the original client order is not completely filled.

Class Action FX Benchmark Lawsuit Filed

A dozen individual lawsuits alleging antitrust and anti-competitive behavior on the part of the 12 largest FX trading banks, based upon their behavior at the WM Reuters London Close FX fix, were consolidated and filed as a class action last week.  The plaintiffs and defendants are listed below.

The allegations are similar to those aired in the press over the last nine months or so.  This suit has updated some of the individual suits based upon recent information from the Bank of England and recently fired or suspended bank traders and include some examples of how FX rates were allegedly manipulated.  While for bank customers and those interested in the integrity of markets, the issue is simply whether or not the allegations are true, for the success of the suit, antitrust and anti-competitive behaviors must be shown.  Thus much of the suit contains the plaintiffs' building of such a case.  Similar issues drove the LIBOR case.

Much of the information for the case and press stories, relates to banks' internal investigations and their cooperation with regulators.  As highlighted in the suit, DOJ LIBOR non-prosecution and deferred prosecution agreements require many banks to provide information relating to benchmark manipulation, including manipulation of FX benchmark rates.

The class has been defined as those trading FX at or around the London Close since at least June 1, 2003. Included are those not trading the fix but trading at around that time of day and those trading forwards and swaps as well as spot.

No attempt is made to quantify damages or who are the members of the class.  Reference is made that records should exist, which we can only assume would be held by the banks.

Plaintiffs                                                                        Defendants
Aureus Currency Fund                                                     Bank of America
City of Philadelphia, Board of Pensions and Retirement     Barclays
Employees’ Retirement System of the Government of       BNP Paribas
       the Virgin Islands                                                     Citigroup
Employees’ Retirement System of Puerto Rico Electric      Credit Suisse
       Power Authority                                                       Deutsche Bank
Fresno County Employees’ Retirement Association           Goldman Sachs
Haverhill Retirement System                                           HSBC
Oklahoma Firefighters Pension and Retirement System     JP Morgan
State-Boston Retirement System                                      Morgan Stanley
Syena Global Emerging Markets Fund                               RBS
Tiberius OC Fund                                                            UBS
Value Recovery Fund
United Food and Commercial Workers Union and
       Participating Food Industry Employers Tri-State
       Pension Fund

Quick Test of your Fraud Detection Skills

Which one of these interest rate histories does NOT look real?!

HINT:  One of the curves represents secondary market trading of the 4-week Treasury bill.  The other curve is 1-month LIBOR set by a panel of banks now accused of providing false and managed "LIBOR settings."

New Consolidated Lawsuit Filed on Alleged FX Rate Manipulation

The WSJ reports that a new lawsuit was filed by 12 investors, all of whom had previously filed individual suits that have been consolidated by the courts into this one suit, amending and expanding upon a suit filed in November, 2013 by A Haverhill Retirement System (first mover advantage for the fund, as it was the first of these type suits filed). Most of the plaintiffs are public pension funds in the US and Virgin Islands, with 12 major banks charged with colluding to manipulate benchmark currency rates.  Collusion is charged, based upon a " small and close-knit group of traders" using chat rooms and instant messaging, often having worked in previous jobs together, living in the same neighborhoods and socializing together.

Interestingly, the complaint did not quantify losses, calling the impact of the alleged manipulation "presently undetermined".  We have looked at this issue as well, but on an industry-wide rather than an individual firm basis.  The work requires many assumptions, particularly when there is no available data as to what, if anything, actually occurred on particular days. Thus, we assume that the plaintiffs will be seeking data from the banks and looking to what regulators unearth to help their case.

Can you spot Satoshi Nakamoto?

Courtesy of Dealbook. http://nyti.ms/1pLezBz 

Are you a miner of Bitcoin without even knowing it?

Two apparently popular Android apps were reportedly using the phones of users who downloaded their apps to mine for Bitcoin without informing them.  ZDNet has more details about the alleged scheme. The two apps, called Prized and Songs, were removed from Google Play as reports circulated about the apps but they are reportedly still available on App Brain.  Something to be said for Apple's gatekeeping role for iOS apps. 

Reuters: 30-some currency traders globally placed on leave, suspended or fired

Reuters reports on the latest casualty from internal investigations at banks relating to the alleged FX manipulation scandal.  While Kai Lew, Deutsche Bank's FX sales director is the first known female to be put on leave, the more interesting number is the tally by Reuters that there are 30-some traders globally who have had administrative action taken against them.  By my count people have been laid off, suspended or terminated on at least 3 if not 4 continents across the major banks.  The reporters over at WSJ have compiled a list for those who want to track.