The Last Look…
Posted by Colin Lambert. Last updated: October 25, 2022
The reaction to Credit Suisse winning its case in New York against FX market manipulation by its traders would support the notion that the wider perception is this was an industry-wide problem back in the day.
To a degree it was a widespread issue, not least because there were so many Bloomberg chats taking place it’s probably harder to find someone who wasn’t on one at some stage, but there is a huge difference in the content people shared – and, importantly, in the guidance given by various institutions.
I have spoken with senior managers previously who have been quite vehement in their views on chats between dealers, and none of the opinions expressed were positive. In some circumstances this was born out of an arrogance that the institution in question didn’t need to know what others were doing, they were big enough thank you, but in others it was because managers saw the lack of controls. As one chief dealer told me years back, had some of the chats been taking place on the phone, they would have heard it (dealer’s ears!) and said something. The problem was, all they could hear was the tap-tapping of a keyboard – on-desk surveillance was nigh on impossible.
A third reason cited was one that I very much appreciated from my dealing days – why would I tell my competitors what I have to do? I am one step closer to them blowing up my execution. True, there was a trust involved in these chats, but how long would it be before one participant, having a desperate time of it in the markets, broke ranks? We have no way of knowing that certain traders at banks didn’t, or did, do this.
What surprised me a little late last week when news broke of the Credit Suisse win, was how so many peoples’ first reaction was “I bet the other banks feel foolish now”. This highlights what is to me the lazy view that everyone was inappropriately sharing information. Clearly not every bank and trader was involved, some kept it nicely in line with what are now generally-accepted standards of confidentiality.
I would also argue – and I accept this is a controversial view in some quarters – that asking about spreads to quote in an amount is perfectly acceptable, as long as the client name isn’t associated with the question in any way. There are plenty of traders out there who quote a limited set of markets and when asked a cross they have little or no idea of the spread in a second or third pair. Back in the day, we used to call a major player in whatever market it was we were quoting a cross in and ask them for a price in an amount. We would then go “my risk” because we weren’t ready to trade. If and when we traded with the client in the cross, we would ask again and trade.
The point of the above is, we, by asking for a price we had no intention of dealing on immediately, found out the spread on, for example, Kiwi in 20. I accept in some cases there would have been attempts to establish the exact spreads for clients in pairs the bank did quote, but again, it most certainly wasn’t the case in all instances.
Sharing of order details is a real no-no, and was before the FX Global Code, so anyone doing that was in the wrong then, as they would be now. Equally, the sharing of personal positions was wrong then, as it is now. As the Code observes, however, generic market colour is fine, and a lot of people, while they may have been loose with their language, kept it generic.
It should be noted that legal experts are saying that the Judge’s pre-trial decision to limit the scope of the charges faced by CS made obtaining a guilty verdict harder, but it was possible, and at the end of the day, the jury found there was insufficient proof that the clients were harmed by what took place in these specific chats.
One assessment of the decision by the jury can be that the bank had adequate controls to ensure its traders didn’t overstep the mark. What does this say about those institutions that settled?
I actually think the general reaction to last week’s decision looked in entirely the wrong direction and focused on the wrong set of victims. The institutions involved in the chat room scandal frankly deserved everything they got because their controls were lax, or in some cases non-existent to the degree that they actually encouraged information sharing without limits. That is why a number of them settled.
What still bugs me to this day is the number of traders that lost their jobs and were effectively collateral damage in this whole fiasco. The judge’s summary will not be published for some weeks it seems, but I am really looking forward to what it says in terms of the controls and oversight by CS.
One assessment of the decision by the jury can be that the bank had adequate controls to ensure, in the jury’s opinion, its traders didn’t overstep the mark. What does this say about those institutions that settled? They have effectively put their hands up to failed oversight, but still thought it fine to fire dozens of traders, who were, to a large degree, merely following instructions (and yes, I understand that they should know it’s wrong, but in 2010 challenging a culture was a very different matter to what it is now).
I fully accept there were some traders who explicitly shared inappropriate information, and acted upon it. They were dismissed as were, one would (often mistakenly) expect, their senior managers – the culture setters, above desk level. Too many, however, were thrown under the bus and that remains wrong to this day.
It should not be perceived, by the way, that I think a few banks are whiter-than-white, in the instance of Credit Suisse the bank has been fined and settled elsewhere about its FX activities, which gives an indication that not all was right in the bank’s FX operation. To that end, however, I recall a US authority’s report on the bank’s use of last look in which it was clearly noted that a senior manager made clear that what was being suggested from elsewhere in the business was wrong. In other words, there was a public voice at senior levels sounding a note of concern – did that happen elsewhere? Probably not everywhere, and that is why too many traders were put in harm’s way.
One final emotion expressed to me over the past couple of days has been “thank goodness (or something like that) this is over”. I hate to tell you but it’s not. There are more lawsuits pending round the world and the ambulance-chasing lawyers are still very active, which means, less frequently admittedly, these issues will still come to the fore.
In a way I don’t mind this, because not only can the industry show how it has responded with a code of conduct that is refreshed regularly, but it will also remind the current generation of the risks involved in stepping over the line.