The last of the UBS Libor settlements to come out was the U.S. one and it has some of the best quotes. There’s the yen swaps trader who said “I live and die by these libors, even dream about them.” There’s … I mean, there is the life and career of Bart Chilton, in toto; here is a thing he said:
“A Conscience Isn’t Nonsense”
Statement of Commissioner Bart Chilton on UBS Settlement
December 19, 2012
Every so often, folks wonder if some in the financial sector believe that having a business conscience is nonsense. Financial sector violations are hurtling toward us like a spaceship moving through the stars. All too often, penalties have been a simple cost of doing business. That needs to change.
Particularly good are the exhibits to the criminal complaint against Tom Hayes and Roger Darin. We’ve previously met Hayes, cleverly disguised as Trader A; he was the senior yen swaps trader at UBS in Tokyo. Darin was the short-term rates trader “in Singapore, Tokyo, and Zurich,” though probably not all at once; he and his team submitted yen Libors for UBS. You can guess what happened when they got together!
But you don’t have to guess because there are lots of transcripts of their chats in the exhibits.1 Here is a problematic one: Read more »
What do you think of the big HFT study? It’s this big HFT study that CFTC chief economist Andrei Kirilenko conducted on S&P 500 e-mini futures at the CME, and it’s already inspired a metaphor from CFTC commissioner and all-purpose spinner of metaphors Bart Chilton:
Mr. Chilton said that the study would make it easier for regulators “to put forth regulations in a streamlined fashion. It’s a key step in the process and it should fuel-inject the regulatory effort going forward.”
Not his best effort, fine. Anyway, the study: I’m not sure I’ve earned the right to have an opinion, both because (1) that, generally, and (2) my model of high frequency traders as micro-mini-market-makers is a bit upended by the fact that the bulk of the HFTs in this study seem to be taking, rather than providing, liquidity.1 It’s possible that the e-mini market is not the best place to measure the overall effects of HFT, either for fundamental reasons (its use for hedging etc.) or more crassly because it lacks the liquidity rebates that drive a lot of HFT in other markets.
That said what I like about this study is that instead of measuring transaction costs in naive ways like “bid/ask spread,” it measures transaction costs in sensible ways like “in a series of zero-sum transactions, how much money do HFTs suck out in profits.” Though the measure of profitability is sort of kooky:
The profits calculated in Table 3 are the implied short-term profits: we calculate the marked-to-market profits of each trader on 1 minute frequencies2 and reset the inventory position of each trader to zero after each of these 1 minute intervals. Then, we sum up all the 1 minute interval profits to get a measure of daily profits. Therefore, we capture the short-term profits of traders and not gains and losses from longer-term holdings.
What this means is that if your model of market-making is “buy at 99.9, wait five minutes, and sell at 100.1,” then your profits might end up showing as 0.2 or -0.2 or zero or something else on that calculation.3 So regular old market making may look bad, while HFT market making – designed to move quickly – looks much better. And so you get this table: Read more »
Like a lot of people I got an email yesterday telling me to close my Intrade account. This will not be a problem for me because:
Now I know it looks like I was terrible at predicting the election, but the real explanation is of course that I was astutely predicting the end of Intrade and managing my account to a level appropriate for that outcome. Though I assume there’ll be a $20 bank transfer fee to get those twenty cents out.
This CFTC suit is weird, huh? It’s effectively shut down Intrade for allowing US citizens to make illegal options trades, but its theory is a bit murky. One obvious thing about Intrade is that it is a little illegal to bet on U.S. elections and Oscar winners and all the other things you can bet on on Intrade, because it is a little illegal to bet on anything. This is America; you’re just not supposed to bet on things.
Except the things that the CFTC is willing to let you bet on.1 That’s a weird grab bag; you can bet on gold and orange juice and pork bellies and interest rates but not … well, not onions, but more relevantly, not elections. The CFTC is not a fan of election betting; earlier this year they rejected a request to allow trading of political event contracts on a derivatives exchange. And of course Intrade is for betting on elections, so of course the CFTC wants to shut them down.
Except that the CFTC isn’t suing Intrade for letting you bet on elections; it’s suing Intrade for letting you bet on the things that the CFTC lets you bet on. Go read the CFTC complaint; it doesn’t mention elections. The CFTC’s problems are with “binary options betting on the future prices of gold and crude oil, and changes in the U.S. unemployment rate and U.S. gross domestic product figures.” Which are just fine for betting on. Just not, it seems, on Intrade. Read more »
Back in December 2007, things weren’t going so well for Matthew Marshall Taylor. He’d just been fired from Goldman Sachs and not only was he out of a job, but his prospects for finding a new one didn’t look so hot, on account of the fact that Goldman planned to put a note in his file detailing the reason he’d been let go– “for building an ‘inappropriately large’ proprietary trading position”– and it seemed unlikely anyone at the firm would be open to serving as a reference for him moving forward. Three months later, however, one bank told MMT that there was room for him at their inn. Morgan Stanley, apparently having decided the incident at Goldman was but an asterisk in what would be a long and fruitful career, told Taylor to come on down, employing him for over four years until he left in July of his own accord and not because of any legal issues relating to his work at Goldman Sachs. Read more »
The memo even explored why Gensler ran the New York Marathon with Corzine’s number more than 20 years ago. According to the report, Gensler learned that Corzine had registered to run the 1991 race. Gensler asked Corzine’s secretary if Corzine was actually going to run. Several weeks later, the secretary informed Gensler that Corzine had decided against running and wouldn’t need the number, the memo said. The secretary gave the number to Gensler. [Bloomberg via DI]
Good lord are these Barclays settlements juicy. Basically every day for two years one Barclays trader or another would send an email to their Libor submitter saying “hey let’s commit crimes, tons of crimes, hahahaha” and then they did. In pathetically colorful language:
Trader C requested low one month and three month US dollar LIBOR submissions … “If it’s not too late low 1m and 3m would be nice, but please feel free to say “no” … Coffees will be coming your way either way, just to say thank you for your help in the past few weeks”. A Submitter responded “Done … for you big boy”.
on 5 February 2008, Trader B (a US dollar Derivatives Trader) stated in a telephone conversation with Manager B that Barclays’ Submitter was submitting “the highest LIBOR of anybody [...] He’s like, I think this is where it should be. I’m like, dude, you’re killing us”.
Or tons more, but I found this one particularly poignant:
Submitter: “Hi All, Just as an FYI, I will be in noon’ish on Monday [...]”.
Trader B: “Noonish? Whos going to put my low fixings in? hehehe”
Submitter: “[...] [X or Y] will be here if you have any requests for the fixings”.
Like … Trader B was kidding right? I mean, in this one single case? He was making a joke about how he was constantly asking for low fixings and the submitter took him seriously? When you joke around about committing fraud and people take you seriously, that’s maybe a sign you should stop committing so much fraud. Read more »
Okay one more from the recent CFTC trilogy: what is up with RBC? Is it the strangest of them all? I’m pretty sure I haven’t earned the right to have an opinion on that, or even a theory, but I have some questions.
One is: what was the scam here? I mean, here was the scam:
(1) RBC buys or owns stocks whose dividends are deductible for Canadian tax purposes,
(2) RBC hedges those stocks by selling single stock futures or narrow-based index futures to other bits of itself,
(3) So RBC is flat, gets the div one way and pays it the other, but gets a tax benefit from the div it gets and also presumably a deduction on the div it pays, so its net position is zero + tax benefit,
(4) EXCEPT that the bit of it that owns the stock and is short the future is flat but the bit of it that bought the future is, of course, long, so summing over all of its bits RBC is still long the stock, which is a part of this that confuses me, though not the only one,*
(5) anyway though the trades were arranged between bits of RBC rather than competitively bid,
(6) but then they memorialized them by printing them to the OneChicago exchange overseen by the CME and the CFTC,
(7) which created misleading prints because they were non-competitively-priced wash sales instead of real market trades between arms’-length counterparties,
(8) so the CFTC sued.
So, sure, I’ll go along … that sounds sort of scammy. But one thing that is weird is that OneChicago as far as I can tell is just a market for memorializing your privately negotiated trades. RBC was trading narrow-based index futures on OneChicago. Here is what OneChicago has to say about those: Read more »
Is this JPMorgan Lehman thing a big deal? I mean the thing where JPMorgan used Lehman customer segregated securities as collateral for financing Lehman, allowing Lehman to overextend itself by a bit more than it otherwise would have, in pretty clear violation of the Commodities Exchange Act, although also maybe by accident? And where the CFTC fined them $20 million in a negotiated settlement today?
I don’t know. On a monetary basis, no – the fine is pocket change to JPMorgan, though it’s pretty big for the CFTC. And the misconduct also seems to be relative pocket change; in September 2008 the relevant mis-credited account was $330mm, vs. like $639bn of assets at Lehman, so 5bps of extra leverage, tiny yaaaay.*
On the other hand, though, there are some obvious things to get worked up about here, if that makes you happy. Here are three, in roughly ascending order: Read more »
One of the joys of structuring financial products is that, when a regulatory door is closed, a window / chimney / possibility of sawing through a non-load-bearing wall is opened, and you get to look for it, and if you find it you get rich.* So I for one look forward to the response to this:
On Monday, the Commodity Futures Trading Commission rejected a plan for so-called political event contracts, wary that mixing politics and trading would create a dangerous cocktail. The agency ruled, in part, that such trading amounts to gambling — and that it could unduly influence election results.
“This is a very slippery slope here,” said Bart Chilton, a Democratic member of the commission. “We need to be supercareful about handing part of our electoral process over to the trading pits.”
So now you can’t go on NADEX and buy presidential futures – have I mentioned that all my money is in Rick Perry futures? I will sell them to you at cost if you’d like – but you have, I suppose, some other options. You can buy mine, of course, or whatever else is kicking around on Intrade, and if you’d like more size you could probably go to our Anonymous Sports Book Manager, if you can find him. Read more »
I find the “MF Global rule” confusing, and to understand it I have to start with some very basic basics. Let’s say I put money in my account at MF Global, which I want to hold as cash or a cash-like thing, because I need it to provide margin for my futures positions. That money is “segregated,” meaning that in some loose sense it belongs to me and not to MF Global, but MF Global can invest it. Now, because I am ignorant, I had to stop here and ask, “why do they do that?” In general, there are two plausible answers:
(1) Because they want to make money for you, or
(2) Because they want to make money for them.
Now I didn’t know which was the right answer. Answer (1) would be like your brokerage firm, which invests your cash sweep into things that make money and then pays you that money. It is a marketing thing: you’re more likely to choose a brokerage that pays you a decent return on your cash sweep. But it turns out that MF Global actually lives in regime (2): they invest your money not to market how they make money for you, but to make money for them. If MF Global puts your $100 into a popcorn popper and $101 comes out, they keep the $1. Read more »