Category Archives: algorithmic trading

Barclays Bankers Bilk Their Clients

By Barry Elias | Thursday, 19 Nov 2015 10:45 PM

“Obfuscate and stonewall.”

That was a June 2011 directive from a Barclays managing director and head of automated electronic foreign exchange (FX) trading. It was the recommended response to inquiries from clients, the sales department, or virtually anyone else regarding bank transactions related to its BATS Last Look functionality, according to the New York State Department of Financial Services (DFS).

The managing director further stressed in the email that one should “avoid mentioning the existence of the whole system.”

Barclays’ “Last Look” functionality enabled traders to cancel the execution of client foreign exchange orders if they were deemed unprofitable to the bank, even if they would be profitable to the client.

Milliseconds became the difference as to whether a trade was executed profitably. Since it could take this amount of time to transmit an order across the globe, the bankers were at a disadvantage relative to the high frequency traders, who can execute within nanoseconds. Instead of quoting greater buy/sell spreads to accommodate potential price movements, which would disenfranchise the algorithmic traders, Barclays opted to possess the right of first refusal for the trade on behalf of its client.

Clients and others were not told the trade terminations were the result of this business policy decision. Senior employees instructed traders and information technology employees not to inform the sales staff of Last Look and the underlying policy. Instead, the information conveyed was vague, misleading, or inaccurate – and sometimes they were not given any explanation. Blaming the malfunction on technical latency issues was a recommended strategy from management.

This case was unleashed during the forex rigging probe, for which Barclays agreed to pay about $2.4 billion to the DFS, the U.S. Justice Department, and other agencies, which included $485 million for its manipulation of forex spot trading. This settlement was part of the more than $5.6 billion agreement by six banks for manipulating the $5.3 trillion daily foreign exchange market. The other five banks include Bank of America, Chase, Citigroup, JPMorgan, Royal Bank of Scotland, and UBS.

Barclays recently agreed to pay $150 million to resolve the “Last Look” allegations of abuse in the foreign exchange market through its electronic trading platform: a very serious charge, since it intentionally sought unfair advantages over clients and counterparties through this venue. The DFS also required the bank to fire its global head of electronic fixed income, currencies and commodities automated flow trading. Barclays has not named the dismissed individual and has admitted to wrongdoing in this case.

This settlement will bring the total litigation provisions for Barclays Bank to about $13 billion since the beginning of the financial crisis. Litigation costs for all financial institutions since 2008 have reached nearly $219 billion, most of it borne by U.S. banks, led by Bank of America with about $70 billion, according to Moody’s, a rating agency. They expect more to come, especially from Deutsche Bank’s exposure to foreign exchange litigation and the Royal Bank of Scotland’s exposure to U.S. mortgage litigation.

Barclays is still not off the hook: It is being investigated for other potential misconduct, including possible manipulation of precious metals markets and payments to Qatari investors in its 2008 rights issue.

Even after the crisis, Barclays continued down the road not to be traveled.

© 2015 Newsmax Finance. All rights reserved.

Market Manipulation Is Menacing to the Middle Class

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By Barry Elias | Friday, 18 Sep 2015 05:54 AM

Wealth and income inequality has risen substantially since the Great Recession, and market manipulation is making matters even worse for the middle class.

Richard Grasso, former chairman and chief executive of the New York Stock Exchange from 1995 to 2003, suggests the average person is severely disadvantaged relative to Wall Street institutions and the causes need to be thoroughly investigated and corrected.

Prompting this remark was stock trading the morning of August 24, when the Dow Jones Industrial Average tanked approximately 1,000 points within the first six minutes on news of a dire Chinese economy that may portend poorly for the world.

The large sell orders precipitated nearly 1,300 trading halts, as ETF indices were unable to execute transactions in an optimal fashion and prices fell below the underlying stocks they held. TD Ameritrade experienced volumes 10 times larger than average in the first half-hour of trading, causing severe price volatility: 30 percent for Facebook within several minutes as its price moved from $86 to $72 to $84.  (Trading is halted for five minutes when there is a price move of 5 percent or more in either direction.)

Ironically, the ETF products are marketed to middle-America so they can participate in the American dream of investing in a cost-effective and diversified manner. However, the lack of adequate trading liquidity and the capital losses that result may greatly offset the low trading cost.

Grasso believes high frequency traders receive proprietary trading information ahead of others and transaction speed trumps competition and fairness. He suggests the trading of shares on more than 60 venues makes execution at the best possible price quite difficult and costly to the little guy.

Jeffrey Sprecher, chairman and CEO of Intercontinental Exchange Inc., also says the stock market is overly complex and needs simplification.

Evidence of market rigging has been uncovered in the pricing of the gold fix, LIBOR and foreign currency exchange.

Recently, 12 banks and two institutions agreed to pay $1.87 billion to settle allegations that they manipulated the $16 trillion credit default swap market by prohibiting exchanges from placing these products on open, regulated platforms where pricing is more transparent.

The 12 banks named in the suit are Bank of America, Barclays, BNP Paribus, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, Royal Bank of Scotland and UBS, along with the International Swaps and Derivatives Association (ISDA) and Markit Group, a data provider.

The Los Angeles County Employees Retirement Association and several Danish pension funds claimed the banks influenced the ISDA to deny intellectual property to the exchanges, such as auction price data.

As part of the agreement, the ISDA will form a committee, comprised of banks and investors that are independent of its board of directors, to license credit derivative products to exchange-like venues.

Currently, ISDA decisions are made by its board, which until 2009 was comprised entirely of bank representatives.

Dark pools have also been under intense scrutiny lately. These venues permit stock trading with greater anonymity than on the stock market exchange, amounting to a competitive disadvantage to many.

Credit Suisse tentatively agreed to pay $85 million to New York and the federal authorities for this practice. Last month, Investment Technology, a New York Brokerage, set aside $20.3 million to settle allegations of wrongdoing.

In January, the UBS Group agreed to pay $14 million for creating an unfair playing field using dark pools. And Barclays is in negotiations with the New York State Attorney General and the Securities and Exchange Commission regarding their involvement in this area.

The middle class has been ill-served by the current financial climate. Perhaps progress is afoot.

© 2015 Newsmax Finance. All rights reserved.

Finance Returns to Its Roots – A Utility

Over the past few decades, the financial industry grew at the expense of its clients. Technology is beginning to change this – fast.

Technological finance, such as virtual currencies, is paving the way for the financial community to return to its original mission: helping consumers and business grow, which provide employment opportunities, stimulate economic activity, and promote prosperity.

A friend, who left a hedge fund to work at a major U.S. bank, recently informed me of his disillusionment when the bank wanted him to keep the good products for the bank and give the bad products to the client: He elected to resign.

As a share of the economy, finance grew 60 percent from 4.9 percent in 1980 to 7.9 percent in 2007 prior to the financial crisis, according to Harvard Business School professors Robin Greenwood and David Scharfstein, in a recent study.

Further, more than 20 percent of all corporate profit sits with the financial industry, according to The Federal Reserve. These data exclude the high levels of compensation received by financial employees in the form of salary, stock options, healthcare, and other benefits.

Intense political lobbying and rampant insider trading have distorted the competitiveness of the financial marketplace. Algorithmic trading is based on a model of receiving proprietary information ahead of others and manipulating the market accordingly to maximize profit at the expense of economic growth for the many. Similar sentiments were echoed this week to me by a friend, who is one of the chief economists for a global financial institution.

We are now witnessing the movement of Wall Street elites into this digital space at a quickening pace.

In the mid-1980s, Daniel Masters entered the oil trading market when it was volatile, relatively illiquid and lightly regulated. He had a successful career in this sector with Shell, Philbro and JP Morgan Chase – until 2013 when slow Chinese economic growth precipitated price declines in commodities and investor outflows. (I presaged the slowdown in this piece more than four years ago.)

Daniel Masters now sees the same opportunities in the virtual currency space that he saw with oil 30 years ago. New Jersey recently approved his Global Advisors fund, which trades bitcoin using an arbitrage strategy to leverage price volatility.

Initially driven by the libertarian-tech community, which favored anonymous, cross-border transactions that eliminated much unnecessary financial intermediation, high profile financial folks are now entering this market segment, despite the recent market turmoil: the collapse of Mt. Gox, the largest trading platform of bitcoin at the time; extreme price volatility; and a large price reduction, from nearly $1,200 at its peak in November 2013 to roughly $300 today.

Lawrence Summers, former treasury secretary, and John Reed, former Citibank chief executive, are now advisory board members of Xapo, a bitcoin startup. Barry Silbert, a former investment banker and founder of SecondMarket – a provider of liquidity for restricted securities – and a prolific angel investor in the bitcoin space, recently launched the Bitcoin Investment Trust that enables investors to trade its shares on an over-the-counter marketplace, though not registered with the Securities and Exchange Commission.

Blythe Masters, former wife of Daniel Masters and former chief financial officer and head of Global Commodities at JP Morgan Chase, is now the chief executive officer at Digital Asset Holdings, a virtual currency start-up that plans on settling digital and financial assets using the bitcoin blockchain ledger technology.

She was instrumental in creating credit derivative products in the 1990s, including credit default swaps that ignited the global financial and economic collapse of the Great Recession.

Separately, Cameron and Tyler Winklevoss, who both had early involvement with Facebook, are now venture capitalists and await approval for their bitcoin exchange-traded fund.

The total market capitalization of bitcoin is slightly more than $4 billion, a pittance relative to the $5.3 trillion of daily turnover in the global foreign currency market, according to the Bank for International Settlements in 2013.

Daniel Masters suspects demand for bitcoin will continue to grow due to its convenient, low cost transaction model for small purchases that integrate more effectively and efficiently with our digital economy: a utility and opportunity unparalleled by today’s payment systems.

The key here: unlike many bitcoin aficionados, Daniel Masters believes the digital currency movement offers significant synergies to the legacy financial institutions, such as banks, and can prosper with proper transparency and regulation: views sympathetic to the financial community and government, which I, too, support.

Where I differ with Daniel Masters is the future pricing of the virtual currency market. Masters expects strong price appreciation for bitcoin. In my view, the purpose of this currency is to ensure more stable purchasing power over time. This suggests the price of bitcoin will rise commensurate with the general price level of goods and services, and offer little in terms of unearned capital appreciation.

Either way, the future is bright for bitcoin.

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