
HSBC Currency Traders Got Greedy on Christmas - dsri
http://www.bloomberg.com/view/articles/2016-07-20/hsbc-currency-traders-got-greedy-on-christmas
======
Overtonwindow
This is extremely complex and it's taking me a few reads to understand it, but
I just want to plug this particular journalist as extremely good in reporting
complex subjects in a way the rest of us can understand. Do check out his
previous article on how T. Rowe Price voted for the Dell buyout by mistake.[1]
Truly a great job at reporting.

1] [http://www.bloomberg.com/view/articles/2016-05-13/t-rowe-
pri...](http://www.bloomberg.com/view/articles/2016-05-13/t-rowe-price-voted-
for-the-dell-buyout-by-accident)

~~~
jackcarter
And my all-time favorite, for the title:

"Law Firm Accountants Were Bad at Accounting, Law"
[https://www.bloomberg.com/view/articles/2014-03-06/law-
firm-...](https://www.bloomberg.com/view/articles/2014-03-06/law-firm-
accountants-were-bad-at-accounting-law)

~~~
stygiansonic
I also like:

Blockchain Company's Smart Contracts Were Dumb:
[http://www.bloomberg.com/view/articles/2016-06-17/blockchain...](http://www.bloomberg.com/view/articles/2016-06-17/blockchain-
company-s-smart-contracts-were-dumb)

Bitcoin Bucket Shop Kicks Bucket:
[https://www.bloomberg.com/view/articles/2015-06-19/bitcoin-b...](https://www.bloomberg.com/view/articles/2015-06-19/bitcoin-
bucket-shop-kicks-bucket)

~~~
fnord123
>Bitcoin Bucket Shop Kicks Bucket

Sounds like it should be on elreg.

------
SonOfLilit
I didn't think I would ever follow a specific "traditional" columnist
regularly until I noticed one great piece too many from Bloomberg View on HN,
with comments drawing my attention to the author always being the same guy.

Today I read him regularly. In fact, it's the only content source I didn't
bother adding to my RSS feed, since I remember to open it every morning.

So yeah, passing it on and mentioning: keep an eye on this Matt Levine guy, he
is great.

~~~
Analemma_
You can get a feed of all his articles, regardless of column/feature here:
[http://www.bloomberg.com/view/rss/contributors/matt-
levine.r...](http://www.bloomberg.com/view/rss/contributors/matt-levine.rss),
or in browser form here:
[http://www.bloomberg.com/view/contributors/ARbTQlRLRjE/matth...](http://www.bloomberg.com/view/contributors/ARbTQlRLRjE/matthew-
s-levine/articles).

He's the only individual columnist at a mainstream press outlet that I've
bothered doing that for, he's that good. (as in, I follow feeds for
newspapers, and feeds for individual bloggers, but only Matt as an individual
newspaper writer).

~~~
mmsmatt
My second most popular tab in Firefox. Levine is a fantastic way to start the
day.

------
jackgavigan
_> Different financial markets have, over long periods of time, evolved
standards of behavior that are not, perhaps, entirely honest in the most
traditional sense of the word. To outsiders -- and to some less experienced
participants in those markets -- those standards can seem shocking, even
criminal. To regular participants, they can seem normal, even admirable._

Indeed, when I did my trader exams back in 2007, the regulations treated
foreign exchange very differently from other asset classes as far as pre-
positioning was concerned, because of the way the FX market traditionally
functioned (e.g. No centralised exchanges), although I believe the regulations
have changed in the past few years (i.e. _after_ this particular incident).

It's very telling that the UK regulator presumably didn't see any grounds for
prosecution or enforcement action. This is a UK bank dealing with a UK client,
_in_ the UK. There's no logical reason for a US prosecutor to be involved.

~~~
easytiger
> There's no logical reason for a US prosecutor to be involved.

US economic imperialism aside?

------
marcusgarvey
Oh wow, the Department of Justice actually went after someone at HSBC. Are
they trying to compensate for a recent report that concludes it let HSBC skate
on its criminal money laundering business because it was too big to jail?

[http://www.marketwatch.com/story/house-committee-says-
hsbc-w...](http://www.marketwatch.com/story/house-committee-says-hsbc-wasnt-
prosecuted-due-to-too-big-to-jail-fears-2016-07-11)

And for background on the blatant money laundering they enabled: >drug dealers
would sometimes come to HSBC's Mexican branches and "deposit hundreds of
thousands of dollars in cash, in a single day, into a single account, using
boxes designed to fit the precise dimensions of the teller windows."

[http://www.rollingstone.com/politics/news/outrageous-hsbc-
se...](http://www.rollingstone.com/politics/news/outrageous-hsbc-settlement-
proves-the-drug-war-is-a-joke-20121213)

~~~
rwmj
Our now-thankfully-ex Chancellor George Osborne personally intervened to stop
the prosecution: [https://www.theguardian.com/business/2016/jul/11/hsbc-us-
mon...](https://www.theguardian.com/business/2016/jul/11/hsbc-us-money-
laundering-george-osborne-report)

"Free to those who can afford it, very expensive for those who can't."

------
lordnacho
I used to trade FX. With this bank as well, though I didn't know these two
guys.

So there's two ways to buy something: agency or principal. If it's agency, you
say to a guy "hey, go and buy me some widgets and I'll pay the amount and
you'll get a little fee".

If it's principal, you say "hey, make me a price that you want to trade at,
and we'll trade, and how you make that profitable for you is your own
problem."

What is front running? Generally, it's where you're the agent, but you use
that fact to scoop yourself some widgets before you do the trade for the
customer. Now naturally, even if you are not literally executing an order for
a client, that flow information is useful to you. For instance you might guess
all the clients are spooked because of some news, and after two of them call
to do the same trade, you guess they'll all do so.

3/4 pm fixing question. Actually seems a reasonable suggestion to do it at the
less liquid fix. A lot of derivatives are fixed at 4pm, and there may well be
some guy out there with a strong interest in moving it. I recall the price
action at 4pm being very odd on many, many occasions.

Anyway, what's confusing to me is why didn't Cairn just get a firm price from
HSBC? You can phone a guy and ask for a few billion if you like, people do it
all the time. Alternatively, anyone can get an unknown execution price; the
banks provide a GUI to everyone who wants one, and you can click the thing
until you've got your amount done. The market won't run out of GBP.

What they seem to have done is give a licence to HSBC to trade their order in
a way that was bound to create an unequal conflict of interest. The bank can
always make it profitable for itself, because they're in control. The customer
is bound to be disappointed when they have both an unknown price and price
impact against them.

It's possible that since Cairn would be a "real money" customer things are not
quite like when I was a customer. Hedge funds are called "leveraged"
customers, and the sales people tend to be different, with a different focus.
The FCA might also be taking a view that real money guys need better
protection than speculators.

I definitely wouldn't have called in to do a single massive trade. I'd have
gotten on the GUIs an clicked my way through, with an uncertain outcome, split
across various banks and over a few days. It's not as if the profits from
selling a business unit will be lost by the currency move between the sale and
the cash disbursement to the shareholders.

Agree that you can't lie to the client about what you've gotten up to. That
part is undeniably bad.

~~~
smallnamespace
> I'd have gotten on the GUIs an clicked my way through, with an uncertain
> outcome, split across various banks and over a few days.

Because you're sophisticated market participant and have sat on a desk. You
understand the price impact of showing potential flow to the Street, and how
to break up an order in order to hide your intent. Would you expect a random
corporate treasurer know how to do that?

Not to mention that there are structural barriers to what you describe -- it
costs money to buy Bloomberg terminals and live market feeds, and not every
treasury department can afford to do that.

What upsets people is that when traders interact with less sophisticated
clients, the latter tend to get fleeced.

It's the same reason people hate car salesmen.

~~~
tptacek
I'm not sure where we are that we've decided people doing _3.5 billion dollar_
transactions are "unsophisticated".

~~~
smallnamespace
There's plenty of stupid money in the market. How else do you think trading
desks make money?

Nobody who understands the FX market would have chosen to run their execution
like that.

~~~
tptacek
That really seems like a "No True Scotsman" definition of "sophistication".
Regardless, it's not the definition the markets use. For the same reason, I
qualify to invest in private company stock by dint of my bank account and
annual income, not by passing a test.

~~~
smallnamespace
Sure, there's the legal and regulatory definition that determines who can
invest in a hedge fund or open a trading account or sign an ISDA... But! those
are just guidelines that ensure that only people who can afford to get fleeced
end up at the table.

The more salient definition is that you're sophisticated if you're able to
consistently turn a profit (or just avoid getting ripped off).

In a more perfect regulatory world, these folks wouldn't have been able to
make the trade until they were properly educated, but we don't live in that
world.

As usual, if you can't spot the idiot at the table, it's probably you.

------
rayiner
> But this is the less interesting claim

The "insider trading pound sterling" claim isn't just less interesting.
Whoever put that in the complaint should get Rule 11 sanctions for making
frivolous allegations.

~~~
bradleyjg
> Rule 11 sanctions

Surely some federal rules of _criminal_ procedure equivalent.

~~~
rayiner
TIL: there is no Rule 11 equivalent in the Federal Rules of Criminal
Procedure. Interesting discussion at United States v. Aleo, 681 F.3d 290,
308-09 (6th Cir. 2012) (perish the thought that a prosecutor could get
sanctioned for filing a frivolous pleading that would get a civil litigator
Rule 11'ed).

------
Tarq0n
"HSBC gained approximately $5,000,000 from its execution of the Victim Company
FX Transactions," or about 0.14 cents per dollar of the $3.5 billion
transaction."

Am I misunderstanding what this says or is the amount of profit about two
orders of magnitude off?

~~~
detaro
$5,000,000 profit / $3,500,000,000 transaction volume = $0.0014 profit per
dollar transaction volume. 0.0014 dollar are 0.14 cents. Seems correct to me.

~~~
Tarq0n
Ah, I did in fact misread it, thanks.

------
Bartweiss
Overall, I appreciate the article, but it seems to oversell the claim that
this _wasn 't_ fraud. They made a purchase on behalf of a client, then lied to
that client about when they were trading and who else was trading.

The front-running claims are messy at best, but there are other claims here
that seem to be bulletproof. When someone hires you for a transaction, and you
explicitly, provably lie to them about the nature of that transaction, surely
that's fraud? HSBC made claims to a client that were blatantly false,
expressly for the purpose of extracting more funds from that client's
transaction.

~~~
Lazare
> They made a purchase on behalf of a client

That's the thing though: Technically and legally, they did not do this.

An _agent_ buys things on your behalf from the people who are selling them;
they have an obligation to obtain the best price for you. A _principal_ is
selling you things which they bought on _their_ behalf; they have an
obligation to sell to you at the price you agreed. And in this case, HSBC was
a principal, not an agent. They made no purchases on behalf of the client;
they made purchases on their own behalf so that HSBC could fulfill the order
that the client had placed _with HSBC_.

It's awkward though because it looks a bit like they were buying on behalf of
a client, and it probably felt to the client like they were acting as an
agent, and the price they agreed on was one that HSBC had some control over,
which is really not a good idea at all without an agent relationship. And yet:
The purchase was not being made on behalf of the client and HSBC was not an
agent of the customer.

> surely that's fraud?

Simplifying a lot: Only if the customer relied on those lies. If I sell you a
used car and I say the last owner's first name was Bob, and it was actually
Bill, and you later regret the purchase, it's not fraud, because you can't
truthfully say that _but for my lies_ you would not have purchased the car. If
I say the last owner was a little old lady who drove it down to the shops once
a week, but they were actually an uber driver who drove it 60 hours a week,
then maybe that was a material and would have impacted your decision. (That's
a question for a jury.)

Offhand, the lies about Russians sound horrible, but I'm not sure what impact
it had on the customer's decisions, especially since it happened _after_ they
agreed to the trade. Now, the lies about liquidity to get them to agree to the
3pm fix might qualify though...

------
known
Irrational exuberance;

