Define "Market" Irony: When JPMorgan's Chief Currency Dealer Is Head Of An FX Manipulation "Cartel"

Tyler Durden's picture

Now that everyone is habituated to banks manipulating every single product and asset class, and for those who aren't, see this explanatory infographic...

Foreign Exchanges

Regulators are looking into whether currency traders have conspired through instant messages to manipulate foreign exchange rates. The currency rates are used to calculate the value of stock and bond indexes.

 

Energy Trading

Banks have been accused of manipulating energy markets in California and other states.

 

Libor

Since early 2008 banks have been caught up in investigations and litigation over alleged manipulations of Libor.

 

Mortgages

Banks have been accused of improper foreclosure practices, selling bonds backed by shoddy mortgages, and misleading investors about the quality of the loans.

 

...revelations that this market and that or the other are controlled by a select group of criminal bankers just don't generate the kind of visceral loathing as 2012's Libor fraud bombshell.

As much was revealed when the second round of exposes hit in the middle of 2013, mostly focusing on manipulation in the forex market, and the general population largely yawned, whether due to the knowledge that every market is now explicitly broken (explaining the abysmal trading volumes and retail participation in recent years) or because nobody ever gets their due punishment and this kind of activity so not even a perp-walk spectacle can be enjoyed, this is accepted as ordinary-course action.

Nonetheless, we are glad that the actions of the FX cartel continue to get regular exposure in the broader media, in this case Bloomberg who, among other things, reminds us that it was none other than JPM's Dick Usher who was the moderator of the appropriately titled secret chat room titled "The Cartel" which we noted previously.  It is this alleged criminal who "worked at RBS and represented the Edinburgh-based bank when he accepted a 2004 award from the publication FX Week. When he quit RBS in 2010, the chat room died, the people said. He revived the group with the same participants when he joined JPMorgan the same year as chief currency dealer in London."

Yes, the chief currency dealer of JP Morgan, starting in 2010 until a few months ago when he quietly disappeared, was one of the biggest (allegedly) FX manipulators in the world. Define irony...

What are some of the other recent revelations?

Here is a reminder of the prehistory from Bloomberg. First came the chat rooms:

At the center of the inquiries are instant-message groups with names such as “The Cartel,” “The Bandits’ Club,” “One Team, One Dream” and “The Mafia,” in which dealers exchanged information on client orders and agreed how to trade at the fix, according to the people with knowledge of the investigations who asked not to be identified because the matter is pending. Some traders took part in multiple chat rooms, one of them said.

 

The allegations of collusion undermine one of society’s fundamental principles -- how money is valued. The possibility that a handful of traders clustered in a closed electronic network could skew the worth of global currencies for their own gain without detection points to a lack of oversight by employers and regulators. Since funds buy and sell billions of dollars of currency each month at the 4 p.m. WM/Reuters rates, which are determined by calculating the median of all trades during a 60-second period, that means less money in the pension and savings accounts of investors around the world.

 

...

 

One focus of the investigation is the relationship of three senior dealers who participated in “The Cartel” -- JPMorgan’s Richard Usher, Citigroup’s Rohan Ramchandani and Matt Gardiner, who worked at Barclays and UBS -- according to the people with knowledge of the probe. Their banks controlled more than 40 percent of the world’s currency trading last year, according to a May survey by Euromoney Institutional Investor Plc.

 

Entry into the chat room was coveted by nonmembers interviewed by Bloomberg News, who said they saw it as a golden ticket because of the influence it exerted.

And after that came unprecedented hubris and a sense of invincibility:

The men communicated via Instant Bloomberg, a messaging system available on terminals that Bloomberg LP, the parent of Bloomberg News, leases to financial firms, people with knowledge of the conversations said.

 

The traders used jargon, cracked jokes and exchanged information in the chat rooms as if they didn’t imagine anyone outside their circle would read what they wrote, according to two people who have seen transcripts of the discussions.

Since nobody investigated, next naturally, come the profits and the crimes:

Unlike sales of stocks and bonds, which are regulated by government agencies, spot foreign exchange -- the buying and selling for immediate delivery as opposed to some future date -- isn’t considered an investment product and isn’t subject to specific rules.

 

While firms are required by the Dodd-Frank Act in the U.S. to report trading in foreign-exchange swaps and forwards, spot dealing is exempt. The U.S. Treasury exempted foreign-exchange swaps and forwards from Dodd-Frank’s requirement to back up trades with a clearinghouse. In the European Union, banks will have to report foreign-exchange derivatives transactions under the European Market Infrastructure Regulation.

 

A lack of regulation has left the foreign-exchange market vulnerable to abuse, said Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business in Manhattan.

 

If nobody is monitoring these benchmarks, and since the gains from moving the benchmark are possibly very large, it is very tempting to engage in such a behavior,” said Abrantes-Metz, whose 2008 paper “Libor Manipulation” helped spark a global probe of interbank borrowing rates. “Even a little bit of difference in price can add up to big profits.

... along with a lot of banging the close:

Dealers can buy or sell the bulk of their client orders during the 60-second window to exert the most pressure on the published rate, a practice known as banging the close. Because the benchmark is based on the median value of transactions during the period, breaking up orders into a number of smaller trades could have a greater impact than executing one big deal.

... and much golf and "envelopes stuffed with cash"

On one excursion to a private golf club in the so-called stockbroker belt beyond London’s M25 motorway, a dozen currency dealers from the biggest banks and several day traders, who bet on currency moves for their personal accounts, drained beers in a bar after a warm September day on the fairway. One of the day traders handed a white envelope stuffed with cash to a bank dealer in recognition of the information he had received, according to a person who witnessed the exchange.

 

Such transactions were common and also took place in tavern parking lots in Essex, the person said.

 

Personal relationships often determine how well currency traders treat their customers, said a hedge-fund manager who asked not to be identified. That’s because there’s no exchange where trades take place and no legal requirement that traders ensure customers receive the best deals available, he said.

In short - so simple the underwear gnomes could do it:

  1. Create a cartel
  2. Corner and manipulate the market
  3. Profit.

And that's why they (and especially Jamie Dimon) are richer than you.