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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PacOps's picture

Is anyone really surprised?

InjectTheVenom's picture

You didn't frontrun that !

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

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.

Gankfest's picture

BoA nothing more than a inflated penny stock...

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.

petolo's picture

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

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.



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.

jbvtme's picture

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

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

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

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.

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.


ATM's picture

Small potatoes... they want MOAR!

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?

Dollar Bill Hiccup's picture

Not surprised.

Shocked ... shocked I tell you!

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....

sixsigma cygnusatratus's picture

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

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.....

Skateboarder's picture

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

"To buy PMs."


IridiumRebel's picture

"To launder cartel funds from heroin?"

ACCESS GRANTED (we got you)

JustObserving's picture

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

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

InjectTheVenom's picture

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

chubbar's picture

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

I Write Code's picture

Does that mean Merrill Lynch or the bank bank.

El Oregonian's picture

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

SweetDoug's picture




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




VD's picture


yogibear's picture

Rope justice is cheaper in the long run.

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.

11b40's picture

Great video & more to come from them.

MontgomeryScott's picture

Check The Kronies home page!

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

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.

One And Only's picture

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


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?

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 

logicalman's picture

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

Just askin'

PontifexMaximus's picture

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

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.

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.

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. 

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.

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.

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.