Archive for the ‘Trading & Financial Markets’ Category

Barclays’ Smoking Chart

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Last week, New York Attorney General Eric Schneiderman announced a lawsuit against Barclays, alleging that the company had led clients to believe that the Barclays LX dark pool was a safe place to go swimming when, in fact, it was teeming with bloodthirsty, man-eating sharks (or “predatory high-frequency traders”, as A.G. Schneiderman put it).

The bombastic language (the word “toxic” appears in the complaint 24 times, one more than “predatory” but well behind the 41 mentions of “aggressive”) masks the fact that the underlying allegation at the heart of the lawsuit is that Barclays “misrepresented” the extent to which participants in Barclays LX were protected from “aggressive” HFT firms.

“Misrepresented” might not sound particularly bad. A.G. Schneiderman presents no proof that Barclays intended to defraud its clients or that clients suffered any losses as a result of Barclays’ misrepresentation. In fact, he doesn’t even accuse Barclays of lying. However, he doesn’t need to because he’s using the Martin Act, a 93 year old state law that redefines securities fraud using a far wider definition than federal securities laws, removing any need to prove intent to defraud or even that fraud took place. The Act gives the New York attorney general broad powers to investigate potential violations. According to Nicholas Thompson, writing in Legal Affairs:

The purpose of the Martin Act is to arm the New York attorney general to combat financial fraud. It empowers him to subpoena any document he wants from anyone doing business in the state; to keep an investigation totally secret or to make it totally public; and to choose between filing civil or criminal charges whenever he wants. People called in for questioning during Martin Act investigations do not have a right to counsel or a right against self-incrimination. Combined, the act’s powers exceed those given any regulator in any other state. 

In the wake of the dot-com crash, Eliot Spitzer used the Martin Act to subpoena Henry Blodget’s emails from Merrill Lynch and went on to extract a total of $1.4bn in settlements from Merrill and nine other Wall Street firms that had over-hyped Internet stocks. Other firms that have fallen foul of the Act include AIG, JP Morgan, Bank of New York Mellon and Ernst & Young.

Barclays is unlikely to put up much of a fight. Schneiderman’s announcement seems to have been timed to coincide with the two-year anniversary of Barclays’ settlements with British and American regulators over its role in the LIBOR scandal (which led to the resignations of both the Chairman and CEO), and comes barely a month after the company was fined by the FCA for failing to adequately manage conflicts of interest in relation to the London Gold Fixing.

Barclays Liquidity Profiling Chart in context

Among the evidence presented by Schneiderman is a chart, taken from a Barclays marketing brochure, which claims to show the results of an analysis of the trading behaviours of participants in the Barclays LX pool (see right).

To quote the complaint:

36. Each circle in the chart represents one firm trading in Barclays’ dark pool. The  size of the circle corresponds to the level of trading activity conducted in the dark pool by that  firm. Different types of traders are assigned different color circles; the pale green circles are  “electronic liquidity providers” (“ELP”), which is the term Barclays used for high frequency traders. Within the chart are two color-coded regions, a green rectangle representing “passive” (i.e., safe, non-predatory) trading activity, and a red rectangle representing “aggressive” (i.e., predatory) trading. The x-axis, (“modified take percentage,” which is percentage of a trader’s orders that take liquidity), and the y-axis, (“1-second alpha,” which is the price movement in the one-second following each trader’s trades), are presented here as relevant measures of trading behavior on the dark pool.

37. The chart represents that very little of the trading in Barclays’ dark pool is  “aggressive.” As represented by the chart, most of the trading in the dark pool is “passive,” and  most of the ELP/high frequency activity is “passive.” In its entirety, the chart represents that Barclays’ dark pool is a safe venue with few aggressive traders.

38. Barclays’ sales staff heavily promoted this analysis to investors as a representation of the trading within the dark pool, and marketed that analysis as “a snapshot of the participants” in order to show clients “an accurate view of our pool.” In addition, certain Barclays marketing materials appended a notation to the chart explaining that it portrays the top 100 clients trading in the dark pool.

39. These representations were false. The chart and accompanying statements misrepresented the trading taking place in Barclays’ dark pool. That is because senior Barclays personnel de-emphasized the presence of high frequency traders in the pool, and removed from the analysis one of the largest and most toxic participants in Barclays’ dark pool.

Later in the complaint, the missing participant is identified as Tradebot Systems, a HFT firm. What’s missing from the complaint, however, is the original chart, showing Tradebot. I got curious, did some digging and turned up what I believe to be the original chart.

Graphic comparing the chart presented by New York Attorney General Scheiderman in his New York v Barclays complaint, with a chart taken from a 2012 presentation by Barclays' head of equities electronic trading, Bill White. Copyright Jack Gavigan 2014. All Rights Reserved.

The 2012 chart clearly shows a large circle (marked X) representing a market participant whose size and position matches the complaint’s description of Tradebot as “the largest participant in Barclays’ dark pool, with an established history of trading activity that was known to Barclays as toxic.”

In the graph from Schneiderman’s complaint, the circle representing Tradebot appears to have shrunk and migrated to the left. You may also notice that a small purple (Internal) circle on the far right of the right-hand chart has been re-coloured blue (Institutional) on the left-hand chart.

According to emails quoted in the complaint (which appears to be largely based on the testimony of a whistleblower), Barclays justification for altering the chart is that it was intended to be a demonstration of Barclays’ ability to monitor and classify trading activity in the dark pool, rather than an accurate representation of the trading activity. Of course, it may yet emerge that the change reflected a real change in the nature of Tradebot’s trading (perhaps after having been challenged by Barclays) but, if that were the case, I would expect the rest of the chart to be updated as well..

A good rule of thumb when considering whether an action or behaviour is appropriate or not, is to imagine what would happen if it were observed by a tabloid journalist. If the journalist could come up with a headline and story that would be embarrassing to the firm, you need to rethink. With the current press focus on financial services, it’s not just enough to avoid breaking the law – banks must be whiter than white.

The whole incident is a setback to Barclays CEO Antony Jenkins’ mission to rebuild the bank’s reputation in the aftermath of the LIBOR scandal. The independent Salz_Review of Barclays after the LIBOR scandal found that there were “cultural shortcomings” and said that the bank needed to undergo “transformational change”.

Bringing about cultural change within financial services firms isn’t easy. Once a culture is established, it becomes self-reinforcing. Those who don’t conform get forced out. For the CEO, talking the talk – even walking the walk – is unlikely to be enough. Culture derives from people, and the processes and structures they form. Changing an organisation’s culture may well require disrupting the organisation first – replacing people, getting rid of the old ways of doing things, and ripping out old power structures, to make space for new ways of doing things. It’s not the sort of thing a CEO can direct from on high – he needs to roll his sleeves up and get his hands dirty.

It’ll be disruptive, it’ll be distracting and it’s be very expensive (both in direct costs and revenue opportunities that are missed during the disruption) but it’s what Antony Jenkins will need to do if he wants to bring about the transformational change Barclays needs.

Update: In February 2015, the judge presiding over the case ruled that the “chart is not materially misleading“, which effectively excludes it from evidence. 

Written by jackgavigan

June 30, 2014 at 10:36 pm

London’s Fin.Tech Opportunity

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This article first appeared on the 3 Beards’ blog ahead of Digital Sizzle 8.

We're gonna need a bigger boat...

Finance and technology have been inextricably linked – and entrepreneurs have been exploiting that link – since the introduction of the telegraph in the 19th century.  Until 1851, news was carried between England and the Continent by ships. That year, however, a telegraph cable was laid across the English channel. A German-born entrepreneur named Paul Reuter (who had previously used homing pigeons to bridge a hundred-mile gap in the telegraph links between Paris and Berlin) opened a “Submarine Telegraph” office in London and negotiated a deal with the London Stock Exchange to provide stock prices from European exchanges, in return for access to the London prices, which he then sold to stockbrokers in Paris. Over the next 150 years, London grew to become one of the world’s top financial centres and the company Reuter founded grew along with it. By the time it was acquired by Canada’s Thomson Group in 2008, the Reuters Group was worth $17.6bn.

For decades, the phrase “financial technology” referred to the institutional finance sector that deals with the capital markets – broker-dealing, sales and trading of shares, bonds and derivatives. Many large, established companies started out as startups.

In 1981, Michael Bloomberg (now the mayor of New York) was made redundant from the investment bank Salomon Brothers. He used his severance package to found a company called Innovative Market Systems to provide market information to Treasury bond dealers. In 1986, it was renamed Bloomberg LLP and by 2008 it was worth over $20bn. Also in 1981, a company called Intercom Data Systems was founded in London. It later changed its name to Fidessa and by 2008, 70% of equity trades in London were being processed through trading systems built on Fidessa software. Today, Fidessa is listed on the London Stock Exchange, with a market capitalisation of over £700m.

By the late ’90s, investment banks were embracing Internet technologies and incubating startups. Tradeweb, an online platform for trading government bonds, was founded in 1996 by a group of dealer-brokers, led by Credit Suisse First Boston. It was acquired in 2004 by Thomson Financial (now Thomson Reuters) for $385m in cash, plus an earn-out of up to $150m. Three years later, a group of investment banks reinvested in a deal that valued the company at over $1bn. MarketAxess, a platform for trading corporate bonds, was incubated by JP Morgan and spun out as an independent company in 2000. It went public in 2004 and is worth $1.5bn today.

Both those companies are based in New York but over the past few years, London has emerged as a prime location for a new generation of financial technology startups like OpenGamma and Kurtosys.

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Written by jackgavigan

March 22, 2013 at 3:49 pm

Examining how Paypal makes money on cross-currency payments

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Making cross-currency payments can be expensive. The mark-up (or, more accurately, the spread to inter-bank FX rates) applied to transactions that involve a currency conversion can be as high as 4%. In the past, it could be argued that the cost of processing international payments and the FX risk that banks assumed when providing the cross-currency component justified such high mark-ups. However, advances in technology now mean that the processing of such transactions can be almost entirely automated, which drastically reduces the cost per transaction, and the FX exposure can be tracked and managed in real-time, which reduces the risk. Furthermore, growth in transaction volumes means that economies of scale can be harnessed to further reduce the costs and risk.

However, mark-ups have remained stubbornly high. An example is the  “Non-Sterling Transaction Fee” that most UK credit card issuers apply when a card is used to make a payment in a foreign currency (card issuers in other countries apply similar fees). This fee is typically in the 2.75-2.99% range and is supposed to cover the costs associated with the currency conversion. However, the fee charged to card issuers by Mastercard and Visa for processing such transactions is just 1%. I’ve never been able to find out the justification for that extra 1.75-1.99%. If anyone can enlighten me, let me know!

Those juicy fees present an opportunity for companies that process credit card payments to persuade customers to pay those fees to the credit card processor instead of their card issuers. Last August, I grabbed some screenshots to demonstrate how Paypal does this.

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Written by jackgavigan

March 12, 2013 at 11:42 pm

Computers don’t cause problems. People do.

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What trading systems look like

The past six months have seen a rash of headlines about computer glitches and failures affecting financial firms. First, BATS had to pull its IPO due to problems with its own trading platform. Then the start of trading in Facebook shares was delayed due to a NASDAQ systems failure. In June, a failed system upgrade affected hundreds of thousands of RBS customers in the UK. Finally, on August 1st, Knight Capital lost $440m in just 45 minutes due to problems with its market-making software.

Now the Chicago Fed has released a letter (PDF) containing the results of a survey, which reveals that “two-thirds of proprietary trading firms, and every exchange interviewed had experienced one or more errant algorithms”. I’m not surprised. I’ve done it myself, creating a ad-hoc market-making tool which malfunctioned when there were no other quotes in the market.

Admiral Hyman G. Rickover of the United States Navy is regarded as the “father of the nuclear navy”, having served as director of Naval Reactors for over three decades. He wrote:

Responsibility is a unique concept: it can only reside and inhere in a single individual. You may share it with others, but your portion is not diminished. You may delegate it, but it is still with you. You may disclaim it, but you cannot divest yourself of it. Even if you do not recognize it or admit its presence, you cannot escape it. If responsibility is rightfully yours, no evasion, or ignorance, or passing the blame can shift the burden to someone else. Unless you can point your finger at the person who is responsible when something goes wrong, then you have never had anyone really responsible.

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Written by jackgavigan

September 21, 2012 at 12:52 pm

Like shooting fish in a barrel…

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More information emerged today about self-proclaimed “trader” and financial markets “expert” Alessio Rastani. The Independent reported that Rastani “hosts seminars for The Wealth Training Company”, which claims to offer “The UK’s Number 1 Stock Market Training Course”, and named his boss as Darren Winters. Sure enough, Rastani (and his now-infamous BBC interview) are featured on The Wealth Training Company’s website (and what a slick and professional-looking website it is, too!).

A spot of Google research revealed that The Wealth Training Company isn’t the first company Darren Winters has run that offers stock market training. He previously ran WIN Investing which, as it turns out, has had a few dissatisfied customers in its time and was censured by the Advertising Standards Authority for making unsubstantiated claims in its adverts. It also appears that, despite running a company that claims to be able to teach you how to make money from trading the stock market, Winters has some trouble keeping his own ventures afloat – he was director of a software company that went bankrupt, owing over £250,000 and WIN Investing itself came very close to collapsing in 2009.

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Written by jackgavigan

September 28, 2011 at 9:34 pm

What makes a trader?

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 Update: While I was busy tapping away at this blog post, the Telegraph published an article on their website in which they quote Rastani confessing that he’s “an attention seeker. That is the main reason I speak.”, before going on to reveal that “Trading is a like a hobby. It is not a business. I am a talker. I talk a lot. I love the whole idea of public speaking.”

Yesterday, the BBC News channel broadcast a live interview with a “trader” named Alessio Rastani, in which he made various provocative statements that have been widely reported and debated across both traditional and social media. The story came to my attention yesterday evening, so I watched the interview online.

He didn’t come across as the sort of person who works in the financial markets. In fact, to me, he came across as the sort of person you occasionally encounter in various fields who claim to be an “expert” or a “guru” but who are, in fact, self-promoting attention-seekers. You see a lot of these in the tech startup industry or the information (or “cyber”) security space. A good starting-point for determining whether someone is a genuine expert or a charlatan is to find out what he does, where he works, what his background is, that sort of thing. So, I decided to do a quick background check on Mr Rastani.

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Written by jackgavigan

September 27, 2011 at 7:28 pm