Bank Of America Caught Frontrunning Clients

Tyler Durden's picture


Every time a TBTF bank releases its 10-Q, we head straight for the section, usually well over 100 pages in, that discloses the bank's total profitable trading days.

This is what the most recent Bank of America 10-Q said on this topic:

The histogram below is a graphic depiction of trading volatility and illustrates the daily level of trading-related revenue for the three months ended September 30, 2013 compared to the three months ended June 30, 2013 and March 31, 2013. During the three months ended September 30, 2013, positive trading-related revenue was recorded for 97 percent, or 62 trading days, of which 69 percent (44 days) were daily trading gains of over $25 million and the largest loss was $21 million. These results can be compared to the three months ended June 30, 2013, where positive trading-related revenue was recorded for 89 percent, or 57 trading days, of which 67 percent (43 days) were daily trading gains of over $25 million and the largest loss was $54 million. During the three months ended March 31, 2013, positive trading-related revenue was recorded for 100 percent, or 60 trading days, of which 97 percent (58 days) were daily trading gains over $25 million.


In summary, so far in 2013, Bank of America lost money on 9 trading days out of a total 188.

Statistically, this result is absolutely ridiculous when one considers that the bulk of bank trading revenues are still in the form of prop positions disguised as "flow" trading to evade Volcker which means the only way a bank could make money with near uniform perfection is if it either i) consistently has inside information that it trades on or ii) it consistently front-runs its clients.

In related news, the only more absurd datapoint was JPMorgan's announcement of how many trading day losses it had in the first nine months of 2013. For those who missed out succinct post on the matter, the answer was clear: zero. The absurdity becomes even clearer when one considers that in the pre-New Normal days, JPM had an almost normal profit/loss distribution in its trading days.

But back to Bank of America, where as we noted, the kind of trading result would only be possible if the bank was aggressively insider trading or just as aggressively frontrunning flow orders in its prop book (a topic we covered back in 2009 as relates to Goldman Sachs, and which the bank sternly rejected).

We now know that at least one of the two almost certainly happened after Reuters report from earlier today that it discovered on the FINRA BrokerCheck page of one of the bank's former Managing Directors, Eric Beckwith, the following curious ongoing investigation:


More from Reuters:

The U.S. Department of Justice and the Commodity Futures Trading Commission have both held investigations into whether Bank of America engaged in improper trading by doing its own futures trades ahead of executing large orders for clients, according to a regulatory filing.


The June 2013 disclosure, which Reuters recently reviewed on a website run by the securities industry regulator FINRA, sheds light on the basis for a warning by the Federal Bureau of Investigation on January 8.


The warning, in the form of an intelligence bulletin to regulators and security officers at financial services firms, said that the FBI suspected swaps traders at an unnamed U.S. bank and an unnamed Canadian bank may have been involved in market manipulation and front running of orders from U.S. government-owned mortgage giants Fannie Mae and Freddie Mac.

Only this time it's different, because a quick check on the background of Beckwith shows that his expertise is not trading MBS but a different product entirely.

First, it goes without saying that Eric would promptly scrap his LinkedIn Profile as the following URL shows.

What Eric, however, was unable to delete was the mention of his name as the Bank of America contact for an "innovative new product created [by the CME and the banks] based on client demand" - Deliverable Interest Rate Swaps Futures, or as some call them Deliverable Interest Rate Products.

What is this newly promoted product, and why is there demand for it? This is what the CME had to say about the benefits of "DIRPs" (even though the technical acronyms is DSFs):

  • Capital efficient way to access interest rate swap exposure
  • Flexible execution via CME Globex, Block trades, EFRPs and Open Outcry
  • Allows participants to trade in an OTC manner:
    • Ability to block calendar spreads
    • Lower block thresholds and longer reporting times
    • No block surcharges

But, as in the case of CDS, and all other novel products, the main reason for DIRPs is simple: an even lower margin requirement compared to Interest Rate Swaps and Treasury Futures (margined together), allowing one to express a position, or better, manipulate the market in Interest Rate products, using the least amount of margin (initial capital) possible.

The following chart explains just this:


Bottom line: if you want to manipulate Treasurys in a reflexive market, where the derivatve almost always drives the price of the underlying (as perhaps explained best by none other than the then-member of the Fed Dino Kos), this is the best product as you get even more firepower for your buck.

Only in this case, anyone trading with the Bank of America DIRPs desk was apparently also being frontrun on a consistent basis.

We are relatively comfortable with alleging that BofA did indeed allow this to happen (whether it neither admits nor denies guilt at the end of the day), because a few weeks after the notice appears in Beckwith's Brokercheck profile on June 14,2013, he promptly "left" Bank of America in July as Reuters reports: not exactly the course of action an innocent man would take.

In other words, while Reuters is focused on the Fannie and Freddie frontrunning angle, it appears the frontrunning activity spread substantially to involve the entire Treasury curve as well!

So while HFTs frontrun all equity retail trades in open markets, major banks frontrun all institutional block equity orders in their own dark pools, we find out that bankers also just happen to frontrun clients in "you name it" over the counter product, where the only reason to be involved is to take advantage of the low margin - something JPM's CIO did quite aggressively and quite well until it blew up of course.

But the best news: we finally know how it is possible that every bank reports quarter after quarter of near uniform trading perfection and close to zero trading day losses.

Finally, our question for the regulators: in a Volcker world in which banks are supposedly not allowed to trade ahead of their clients, why are banks, well, trading ahead of their clients!?

* * *

Appendix 1 - the CMEs overview of Deliverable IR Swap Futures


Appendix 2 - Eric Beckwith's Brokercheck profile

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Sat, 01/25/2014 - 16:41 | 4367149 PacOps
PacOps's picture

Is anyone really surprised?

Sat, 01/25/2014 - 16:43 | 4367158 InjectTheVenom
InjectTheVenom's picture

You didn't frontrun that !

Sat, 01/25/2014 - 16:46 | 4367167 debtor of last ...
debtor of last resort's picture

*dirp* , pardon me..

Sat, 01/25/2014 - 17:04 | 4367207 jbvtme
jbvtme's picture

i own a '05 3/4 ton chevy diesel pickup with four wheel drive.  my question is this: when the time comes, how many banker's bodies will i be able to tow around the colosseum before i begin to lose traction?  thanks

Sat, 01/25/2014 - 17:17 | 4367223 chunga
chunga's picture

Leave a good amount of slack in your tow-rope; then go toes in.

Picking up a good head of steam may snap off a few heads but who cares.

Sat, 01/25/2014 - 17:47 | 4367295 Gankfest
Gankfest's picture

BoA nothing more than a inflated penny stock...

Sat, 01/25/2014 - 18:07 | 4367322 insanelysane
insanelysane's picture

The government belongs to us.

- Banksta Cartel

ps.  We need law enforcement to doggedly pursue old Italians not "market makers" like us.

Sat, 01/25/2014 - 19:54 | 4367482 petolo
petolo's picture

About that truck: keep inflation on the low side and use tire chains if you can get them.

Sat, 01/25/2014 - 20:32 | 4367532 aVileRat
aVileRat's picture

Would be very interesting to see which desks were doing this.

I wonder how big the front running digital shadow was. Would really suck for BoA to lose a few of their big-fish fund clients right before Basil III and CoCo goes live.



Sun, 01/26/2014 - 13:42 | 4368518 Oracle 911
Oracle 911's picture

jbvtme wrote: i own a '05 3/4 ton chevy diesel pickup with four wheel drive.  my question is this: when the time comes, how many banker's bodies will i be able to tow around the colosseum before i begin to lose traction?  thanks


I'm afraid not enough.

Sun, 01/26/2014 - 13:28 | 4368494 jbvtme
jbvtme's picture

krugman, you fucking reprobate. you'll be tied to the front bumper

Sat, 01/25/2014 - 17:01 | 4367199 sixsigma cygnus...
sixsigma cygnusatratus's picture

But if BofA isn't allowed to frontrun, then a Ponzi becomes the only alternative.  How else are they supposed to make money? /s

Sat, 01/25/2014 - 17:39 | 4367267 Caviar Emptor
Caviar Emptor's picture

Spoon boy: Do not try and analyze the market, that's impossible. Only try and realize the truth.
Neo: what truth?
Spoon boy: There is no market
Only then will you begin to see that it's not the market that moves, but only BoAML Bernank

Sat, 01/25/2014 - 17:52 | 4367302 XenoFrog
XenoFrog's picture

Don't worry. They'll pay a fine that adds up to about 1% of what they stole. Just like if a young guy robs a 7-11 all he has to do is repay 2$ out of the $200 he stole and no jail time.

Sat, 01/25/2014 - 19:09 | 4367422 unununium
unununium's picture

By doing nothing.  Excess reserves created by, and parked at, the Fed, still pay .25%.  All BAC had to do is part with some toxic MBS at par for the privilege.

All told there is $2.5T parked there.  That is $1.5B per quarter being paid to banks.  For doing nothing.


Sun, 01/26/2014 - 13:33 | 4368503 ATM
ATM's picture

Small potatoes... they want MOAR!

Sun, 01/26/2014 - 09:02 | 4368126 Martel
Martel's picture

What the banks need now, is good publicity. Let's rename that ugly frontrunning to something more positive. How about anticipatory trading?

Sat, 01/25/2014 - 17:03 | 4367205 DontGive
DontGive's picture


<surprise face>

Sun, 01/26/2014 - 12:41 | 4368419 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Not surprised.

Shocked ... shocked I tell you!

Sat, 01/25/2014 - 16:52 | 4367151 IridiumRebel
IridiumRebel's picture


in other news...... twitter feed on posts

Lee Boyce from This is Money says: It would be logical for a bank to have a cap on the amount you can withdrawal over the counter without notice – if dozens of people went in asking for large sums, especially in smaller branches, they would risk running out of cash stocks.

Calling up a day in advance and giving notice of the amount of cash needed, then entering the branch with a passport and another form of ID should be sufficient. However, in your case, Swindon branch staff have not allowed this and wanted more information.

I understand you feeling that it’s your money and that you should be able to have access to it how you see fit. 

But I can also understand HSBC doing what it can to prevent fraud – there has been a rise in the number of sophisticated scams duping people out of their money in recent times.

Last year saw the rise of courier scams which work by hoodwinking customers into withdrawing money from their bank – and handing it over to a fraudster pretending to represent the bank. 

However, if you give sufficient notice and want a large sum of cash out and can prove who you are surely the bank has to give it you? It is your money after all.

I asked HSBC if this is the case and whether its policy has changed.

A spokesman from HSBC said: ‘We may ask about the purpose of a cash withdrawal when the transaction is large, unusual and out of keeping with the normal running of a customer’s account.

‘In these instances we may also ask the customer to show us evidence of what the cash is required for. The reason for this is twofold, as a responsible bank we have an obligation to our customers to protect them, and to minimise the opportunity for financial crime.

‘Transactions involving large sums of cash have inherent security issues and leave customers with very little protection should things go wrong.

‘So it’s only correct that, when appropriate, we ask customers the right questions and explore whether an alternative payment method might be safer and more convenient for them.

‘There is no restriction on the amount a customer can to withdraw from their accounts electronically, via cheque or banker's draft.’


It's beginning to take off....

Sat, 01/25/2014 - 16:53 | 4367179 sixsigma cygnus...
sixsigma cygnusatratus's picture

Thank God HSBC is the only one!  Had me worried for a moment! : D

Sat, 01/25/2014 - 16:55 | 4367185 IridiumRebel
IridiumRebel's picture

The twitter feed is beginning to explode....I saw a couple of pics of line or queus in Swindon and Bristol on twitter but they were quickly removed. After Northern Rock, the UK folks are once bitten twice shy.....

Sat, 01/25/2014 - 16:57 | 4367194 Skateboarder
Skateboarder's picture

"Sir, what will you be using your cash for?"

"To buy PMs."


Sat, 01/25/2014 - 17:00 | 4367197 IridiumRebel
IridiumRebel's picture

"To launder cartel funds from heroin?"

ACCESS GRANTED (we got you)

Sat, 01/25/2014 - 16:42 | 4367152 Jannn
Sat, 01/25/2014 - 16:57 | 4367192 holdbuysell
Sat, 01/25/2014 - 16:42 | 4367155 JustObserving
JustObserving's picture

How are we supposed to make money without an edge?  Banksters of America

Sun, 01/26/2014 - 07:10 | 4368055 PeaBird
PeaBird's picture

You aren't beecause you got nothing except counterfeiting. However, here's an edge for you...the edge of a guillotine.  :o

Sat, 01/25/2014 - 16:45 | 4367163 InjectTheVenom
InjectTheVenom's picture

yaaawwwwwn ... anyone know who went home on Idol this week ?

Sat, 01/25/2014 - 16:45 | 4367166 chubbar
chubbar's picture

Look for these banks to suddenly not be required to report this information in their 10Q

Sat, 01/25/2014 - 16:46 | 4367170 I Write Code
I Write Code's picture

Does that mean Merrill Lynch or the bank bank.

Sat, 01/25/2014 - 16:47 | 4367172 El Oregonian
El Oregonian's picture

Heck, and all this time I thought being a "Front runner" was considered a good thing.

Sat, 01/25/2014 - 16:55 | 4367174 SweetDoug
SweetDoug's picture




There'll be a investigation, fines will be levied, no guilt admitted, move along…




Sat, 01/25/2014 - 16:49 | 4367175 VD
VD's picture


Sat, 01/25/2014 - 19:09 | 4367421 yogibear
yogibear's picture

Rope justice is cheaper in the long run.

Sat, 01/25/2014 - 16:55 | 4367187 Count de Money
Count de Money's picture

Bank of America Frontrunning? Because they have G-Force!

I'm actually surprised this video hasn't made the top bar of ZH yet.

Sat, 01/25/2014 - 19:03 | 4367411 11b40
11b40's picture

Great video & more to come from them.

Sun, 01/26/2014 - 12:39 | 4368415 MontgomeryScott
MontgomeryScott's picture

Check The Kronies home page!

saved in my favorites...I will be opening it daily...

Sat, 01/25/2014 - 16:56 | 4367190 disabledvet
disabledvet's picture

In other words "both trading on inside information AND front running the client."

Meaning "how is this good for the client again?" (that would include the Bank btw.)

These "swing traders" and "momo jockey's" can get things out of hand...which probably works if you have inflation...but once prices start to fall the ability to "mystically trade" can whither dramatically.

As much as equities trade on liquidity (discounted) the same is even MOAR true with debt. "Free cash flow from operations" involves paying the Banker...not just the bond and equity holder (in the form of a dividend.)

In other words "you have to get product either out of the ground or in the hands of consumers before it can be monetized."

The Fed has been very fortunate to not only be monetizing at a point in time when the US was in the midst of a massive energy boom but also to be monetizing when there were various "cyclical" changes that do not happen quite often.

I do reiterate I think going back on Taper would be a BIG mistake right now...but we'll see.

Sat, 01/25/2014 - 16:59 | 4367195 One And Only
One And Only's picture

Some 20 year old at the NSA front ran the clients and BAC.


Sat, 01/25/2014 - 17:01 | 4367198 Bangin7GramRocks
Bangin7GramRocks's picture

How do they explain the sudden near-perfect trading record when historical norms are much lower? Why doesn't this bother the government or other 300 million people in this country? Am I the one taking crazy pills?

Sat, 01/25/2014 - 17:33 | 4367259 Midas
Midas's picture

I deal with it by not doing any business with them.  The banksters can't front-run you if you aren't trading.  I would love for them to front-run me at 

Sat, 01/25/2014 - 20:35 | 4367536 logicalman
logicalman's picture

Given you are dealing with such a trustworthy bunch, would you believe a word of any explanation they gave?

Just askin'

Sat, 01/25/2014 - 17:01 | 4367201 PontifexMaximus
PontifexMaximus's picture

What a funny question: banks are ALWAYS trading ahead of their clients! Commissions will never make up ur bonus!

Sat, 01/25/2014 - 17:03 | 4367209 q99x2
q99x2's picture

Jail the FED. Arrest Eric Holder. Let Obama have the sex change and send him back to the country where he was born.

Sat, 01/25/2014 - 17:06 | 4367211 ncdirtdigger
ncdirtdigger's picture

and just by coincedence, their customers lost money on all but 9 of 188 days. Surely this is just a statisical anomoly.

Sat, 01/25/2014 - 17:24 | 4367240 Carl Popper
Carl Popper's picture

And if this surprises anyone then said anyone is a naive idiot. 


Banks do not have clients.  They have muppets and counterparties. 

Sat, 01/25/2014 - 19:11 | 4367426 FeralSerf
FeralSerf's picture

They have victims.

But, to be the devil's advocate, if the maximum penalty for robbery is a fine of half of what one has stolen, then stealing is just good business. The shareholders will love them for it.

Sun, 01/26/2014 - 17:38 | 4369121 Offthebeach
Offthebeach's picture

That's not a fine, that's kicking up to the boss, like a Mafi soldier to his crew capo or underboss.

Remember, pigs get slaughtered.

Sat, 01/25/2014 - 17:26 | 4367244 lightbulb
lightbulb's picture

Johnny Caspar: It's gettin' so a businessman can't expect no return from a fixed fight. Now, if you can't trust a fix, what can you trust? For a good return, you gotta go bettin' on chance - and then you're back with anarchy, right back in the jungle.

Do NOT follow this link or you will be banned from the site!