Skip to main content

Bank Of New York Didn't Mean For You To Take Things Like "Best Available Price" Literally

  • Author:
  • Updated:

You may recall that the New York attorney general is suing Bank of New York Mellon for maybe ripping off its FX customers a little bit by doing things like telling them that they would get the "best price" of the day on transactions and then actually giving them the "worst price," which you could totally see how they might confuse those two.*

I love this suit because, to my untrained ear, it all sounds pretty maximally shady but also weirdly normal, and kind of like BoNY isn't doing anything illegal here. BoNY ... kind of agrees with that, since they filed a motion to dismiss the case today:

“This lawsuit is wrong, both on the law and on the facts,” Kevin Heine, a BNY Mellon spokesman, said in a statement. “It is based on a fundamental misunderstanding of the role of custodian banks and the operation of the global foreign currency market.”

BNY Mellon argued in its filing that customers “had all the material information they needed to assess the trades.” The bank each day published rates and executed standing-instruction transactions at rates “no less favorable” to the client than the published rates.

The bank then provided clients with confirmations or account statements accurately reflecting the actual price BNY Mellon applied to each transaction, it said. The bank wasn’t legally obligated to disclose its pricing methodology or its profit margins.

So that's a little silly - "we publish rates, and then we execute at no worse than the published rate" is just a little bit short of "we execute at the best rate." (It's closer to "we make up a rate, and then we execute at it.")

But the basic point is pretty fair, no? Foreign exchange pricing is about as transparent as they come. You can get intraday prices on Yahoo. Even as I type this, my inbox is filling up with offers of can't-lose retail forex investing strategies. How hard can it be? Sure BoNY's ex ante edge was excitingly non-transparent and hard for clients to value - but anyone who wanted to figure out how much it actually cost them could just look at where their trades executed and compare that to Yahoo.

Any commoditized business like providing these spot FX transactions really should fritter away into zero profit margin pretty quickly. The basic function of a banker is figuring out how to avoid that. I don't know that that's a socially valuable function - maybe it is, in that banks would be less likely to provide these services at zero-ish profit, or in that someone has to buy contrast-collar shirts - but it's not usually an illegal one.

There are a couple of ways to convince clients to pay you for a thing that really ought to be free. One is to provide valuable, life-affirming, client-pleasing services. That's tough to do in a really commodity product, but you can always try: send your clients interesting research about the FX markets (why?), take them out for nice dinners when they're in Pittsburgh. Or, more plausibly, you hustle elsewhere to make them like you - which it seems like BoNY did, since these transactions were part of a broader custody business. Most of the clients I dealt with, however sophisticated or unsophisticated they were about specific transactions, generally understood that my job was to make money and that, if they liked me and/or their relationship with my employer more broadly, they should give me some money. Because if they never gave us any money that relationship would go away. And they got value from at least some of what we did that could not be recreated elsewhere.

But another way is to rely on customer laziness and ignorance. There seems to have been a certain amount of this here; the lawsuit alleges that customers who complained ended up getting better execution. This is harder to justify high-mindedly but it's surely part of the thought process: customers who don't care about their FX costs sort of by definition don't care that much about their FX costs. If they don't want the money, why shouldn't we have it?

Still you can overplay your hand a bit. Telling clients "we'll execute your trade for you, don't worry about the details, you'll get a fine price, a lovely price" is a good way to profit when they don't really care about the price they get. Telling them you'll give them the "best price" gives them something that they can - and might feel compelled to - check. And when you check that you're getting the best price, and find out that you're actually getting the worst price, this may not be what you want to hear:

“In context, BNYM was not literally guaranteeing the best rate available for any kind of transaction, anywhere,” the bank said.

Bank of New York Asks Court to Dimiss New York’s Currency Trading Lawsuit [Bloomberg]

* I mean, it's FX. The best CHF/USD price is the worst USD/CHF price. I confuse them all the time.



Banks May Have Trouble Taking Full Advantage Of JOBS Act's New Opportunities For Deceiving Clients

My time in the financial industry entirely postdated the global research settlement, which means that I have a different view of sell-side research from some of the olds. As far as I can make out, there are people who think that investment bank research was once a demonic scheme in which research analysts - larger-than-life figures whose recommendations were irresistible to the retail investors who in this vision bought all of every pre-2003 stock offering - swindled those besotted retail investors into buying crap stocks at inflated prices so that the banks could get gigantic investment banking fees. Whereas I always thought that investment bank research was a sort of cute endeavor of unclear commercial purpose, taken skeptically by the institutional investors who buy most of every post-2003 offering, made fun of by bankers, and conducted by people whom we never saw because, among other things, our network was set up to prevent them from emailing us and vice versa. Perhaps before the settlement giants roamed the halls of research divisions, defrauding investors with abandon, but once their email was cut off from the bankers' email they retreated into mousy irrelevance? Unclear. In any case THEY'RE BACK BABY, sort of: