It's not often something shocks me in the world of finance any more, but it happened yesterday. Omer Rosen, a former corporate derivatives guy from Citigroup, aired some very dirty laundry. How dirty? I've got a former boss doing nine years in the Federal pen today for running a similar scam. I'm not sure what shocked me more: the nonchalance towards the complete and utter breach of any semblance of fiduciary duty, or the fact that the author actually came out and admitted it. Without further ado, here's the article:
My post on quitting banking yesterday drew many interesting and well-thought out comments, but one really stuck in my head after reading this article. It was the comment by A Posse Ad Esse which stated he'd quit banking the moment he compromised his morals. I'm sure many of you feel the same way. What you might not realize is how big a sewer some aspects of banking have become.
This is not an isolated incident. If stuff like this is happening at Citigroup, it's happening everywhere. For those who don't know what a bucket shop is, Investopedia defines the term thusly:
2. A brokerage that makes trades on a client's behalf and promises a certain price. The brokerage, however, waits until a different price arises and then makes the trade, keeping the difference as profit.
- The second definition for a bucket shop comes from more than 50 years ago, when bucket shops would do trades all day long, throwing the tickets into a bucket. At the end of the day they would decide which accounts to award the winning and losing trades to.
Now, here's what Rosen says his desk was doing:
If a client requested verification of our pricing, we volunteered to fax a time-stamped printout of market data from when the trade was executed. One person talked to the client on the phone while another stood by the computer and repeatedly hit print. The printouts were sorted, and the one showing the most profitable rate for the bank was faxed to the client, regardless of which rate was actually transacted. If a rate for the client’s specific trade was not on the printout, we might create rigged conversion spreadsheets for them to use in conjunction with the printout.
Can someone explain to me how that's not bucketing a trade?
I'm not about to claim we were angels back when I was swinging the bat. We colored outside the lines plenty. The difference was - and this is an important difference - it wasn't institutional.
If a guy wanted to take a chance trading on inside information or something like that, it was him doing it individually. It wasn't something the whole bank was doing as a matter of policy. In fact, it was often the guy's own compliance department who caught him, fired him, and turned him into the regulators.
Today the cheating has been institutionalized, and it goes all the way to the top. When the C-level executives at a bank are running Repo 105 scams, what the hell do you think is going on downstairs on the trading floor?
UPDATE: Here is Citi's official response to the article:
“The allegations of this former employee, who last worked at Citi seven years ago, are unfounded and any implication that unethical behavior is accepted or rewarded by the firm is completely without merit. Citi strives to create the best outcome for its clients through conduct that is transparent, prudent and dependable.”
http://www.benzinga.com/11/02/825387/video-cnbc-michael-lewis-on-irelan…
Not in the same league, but keeping with the idea of compromising morals, a ML research analyst was let go because of his view on Ireland, and a couple weeks later ML was earning fees from underwriting Ireland debt. Its def not the same extent as the Citi thing, but this type of thing really gets to me.
Eddie,
My former roommate, may he rot in hell that dirty sumbitch worked for 2 shops that were like this. I have no idea why the shops were in existence, but the principal is barred from doing anything related to the securities industry in two states because of his past dealings running a bucket shop. Hell, my roommate's client, an SEC Lawyer (how he landed that one was beyond me), even told him he should move shops as he's working for a really shady place to be.
This still will always go on... it's just a matter about finding ways to catch it.
Strange as it may sound, I am not at all astonished with these practices described above. Maybe this lack of moral trend in business these days is a new norm that we all have to deal with...
Every dollar that one person makes, ultimately comes out of someone else's pocket. Bucket shops, overpriced software, or any other host of products and services all follow that rule. Capitalism is ultimately the survival of the fittest. If it makes money, and doesn't send me to prison, then it is a good idea. Politicians take ethics and morals into account when they make the system, bankers take profit maximization into account when looking for inefficiencies in the system. That's the system we have, and I think it is a beautiful thing.
Hard to believe that kid was doing those things before he turned 23. The scary thing is it's not entirely surprising. Good read Eddie.
I guess I don't understand this concept....
If a broker goes at risk for a client and makes money by trading out of that risk....this is unethical?
Or am I not understanding the first definition from Investopedia....I mean if an Index fund says "guarantee me a price" and he gets his price, is it wrong if the broker actual is able to make money off that trade himself??
How is that different than this definition of a bucket shop?? Excuse my ignorance
Please tell me you're joking.
If a mutual fund places an order for 10,000 shares of XYZ at $10 or better and the trade fills at $9.50, you think it's okay to tell the client that the trade went off at $10 and you pocket the hook? Because this is the same thing.
No I'm not saying you lie to the client, but on those kinds of event trades you don't make commission.
You are taking risk for the fund because the fund can only take a certain amount of risk.
I'm not saying you buy at $9.50 and give it to the client at $10.00, I'm not talking about that.
I'm saying on non-commission trades that have a long time horizon when a broker says I'll give you 2 pennys better than the closing price on day XXX no matter what happens between now and then.
Addition:
Your example is more like a client comes in and says I need to buy 10,000 shares of XYZ and my avg. price is $9.50 on the trade but I lie to him and tell him it was $10.00.
^ If that is what this bucket stuff is then I now understand why it is wrong and unethical, investopedia should define it that way.
M.C.Trader,
If I were a broker and I was going to guarantee you a price, I would be at a loss for every cent over the price that was guarenteed and see a profit for every penny below the price.
So, say I guarentee you a price of $20/Share in a stock. I buy it at $19.90/Share for our firm's own account and then resell it to you at $20 from our own inventory. I take a dime per share as profit and then charge a commission on top of it.
Under SEC/FINRA Regulations, it is illegal to guarentee a price of a security. If you wanted to buy MSFT at $20, the only thing I could do is put in a limit order at $20 and I couldn't guarantee you anything regarding the price or execution of your order.
I guess my example is only relevant when someone is tied to a bench mark...like an index fund is tied to the SP 500 for example.
A name is going to get added to the index a week from now, obviously under performance is a bad thing, but outperforming the bench mark is also a bad thing because that is a red flag to clients that I may be taking on more risk than is in my prospectus.
So my prospectus may say that I can have some out performance but only very little, so maybe I call a broker and say when XXX gets added a week from now, can you sell me stock at 5 bps better than the closing print?
This would be illegal? I was under the impression that these kinds of deals happen all the time between the sell side and buy side.
Again, I'm some what new to the day to day happenings of sell side finance so take these as questions not statements...I'm just trying to learn and understand everything
"If a mutual fund places an order for 10,000 shares of XYZ at $10 or better and the trade fills at $9.50, you think it's okay to tell the client that the trade went off at $10 and you pocket the hook? Because this is the same thing"
no, but what about when a guys comes for something which isn't traded in an exchange, with a 10.00 limit and you're pretty sure you can source them down at 9.50? you think it's wrong to fill the guy at 10, then go and try to buy them back for yourself at 9.50? that is many trading desks' business model.
what i have often seen done is a guy comes in for a bid or offer, and we try to get an order that we can work. but if you have a 10 limit, you buy them at 9, and sell them to your guy at 9.75, has anything wrong happened? the guy would've taken them at 10!
On a side not didn't the head guy from Citibank just get a raise last week? Interesting read Eddie
To be frank, this is why I'm not completely comfortable with where I'm summering and glad I have options still open before I graduate. I cannot stomach working in an environment where this is common practice, with product and pricing manipulation so dirty. Call me what you want, an anachronism in a cutthroat world, but I can't do something that's gonna compromise my integrity and not go absolutely mental.
Great post Eddie. Would you mind posting your favorite sources for information? It seems that you read a panoply of online newspapers.
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