FINRA Drowning In Complaints About Market Manipulation

Tyler Durden's picture

Whether it is due to the general investing public finally realizing that the market is neither fair nor efficient, that the scales are tipped against the common man from the moment the 'Buy' (or, more rarely, 'Short') button is pressed, or that as the past two years have shown the market is dominated by insider trading, "expert networks" and big legacy investors surviving only due to the government's intervention on their behalf at critical times, is unknown, but Finra is now officially and finally drowning in a barrage of complaints about market manipulation. And to be sure such glaring reminders as 30 year-old UBS traders being singlehandedly responsible (of course, nobody noticed anything over the months and months of creeping illegal trades) for massive cumulative losses that amount to more than the entire net income for the bank (an odd and convenient scapegoat that), will surely not make Finra's life any easier. As Reuters reports: "A Wall Street regulator said industry complaints about market manipulation and trade reporting have spiked this year, raising questions about the adequacy of banks' internal controls over their traders. FINRA has received complaints this year about banks' audit systems, canceled orders, and brokers misrepresenting whether orders were on behalf of customers. "These are areas that for a long time we were not receiving complaints in, and all of a sudden this past year it's really spiked up," DeMaio, senior vice president in FINRA's market regulation unit, told a FIA options industry conference." That's great: so US investors can sleep soundly knowing full well fiascoes such as UBS' Delta One implosion will be confined to the UK (where, incidentally, the director of market at the local regulator, FSA, just resigned - it is unclear if he will follow a recent previous FSA departure straight into the willing clutches of such a non-market manipulative entity as JP Morgan), and that manipulation is being rooted out in the US at its core at a brisk pace.

Right? Maybe not:

The UBS rogue trading case could intensify pressure on regulators to ferret out wrongdoing. In the United States, it will also put more pressure on rulemakers to craft tough regulations as they implement the Volcker rule, a part of the 2010 Dodd Frank financial oversight law that limits banks from betting their own money in financial markets.

 

FINRA has made stopping manipulation a priority the last couple of years. The regulator, funded by the financial services industry, monitors trading and reports to the U.S. Securities and Exchange Commission.

 

"We're seeing a large number of order misrepresentations, we're seeing problems with our audit trail," DeMaio said, adding some brokerages have identified orders as customer orders when in fact they originated from the firm itself.

 

FINRA has asked firms if they have seen some of the problems internally, and whether they've taken steps to address them, DeMaio added.

And while, rhetoric aside, everyone knows that Finra is completely incapable and actively dissuaded from handling anything that could potentially harm any of the real market "manipulators", because after all Finra is a self-regulating organization which in a market that depends on manipulation means it can't really do much if anything, concerns about record plunge in market confidence are pushing regulators to extend the Volcker Rule to overseas banks with US operations to make sure the Kweku Adoboli incident does not spread to the US courtesy of lax internal risk controls such as that exhibited by UBS, and present the optics they are doing at least something:

Regulators writing a rule limiting proprietary trading by U.S. banks are considering extending the restrictions to overseas firms with operations in the country, according to four people familiar with the proposal.

 

“There is no question that we would lose jobs,” said Wayne Abernathy, vice president of the American Bankers Association in Washington. “A lot of what the banks have been doing in recent years to diversify their services are activities that can easily be done by foreign competitors.”

 

The rule, named for the former Federal Reserve Chairman Paul Volcker, includes exemptions for government-guaranteed investments, hedging, market-making and insurance-company transactions. It also exempts proprietary trading conducted “solely” outside of the U.S.

 

The language of the bill is subject to interpretation by regulators at agencies including the Federal Reserve and the Federal Deposit Insurance Corp. Dodd-Frank, signed into law by President Barack Obama last year, requires regulators to adopt rules to carry out the provision by Oct. 18.

 

Regulators are considering how to define operations conducted “solely” outside of the country. Trading managed in the U.S. or involving U.S.-based advisers may be subject to the rule even if it takes place overseas and has no U.S. investors, the people said.

Well, courtesy of the staged UBS scandal, that will not be the case any longer.

What also won't be the case, is the plan to promote Delta One in replacing and recycling the correlation-cum-prop trading revenue generator that was implicitly eliminated with the Volcker Rule, but was merely morphed over to a new form of correlation desk trade only this time with a fancier name.

The WSJ reports on the imminent demise of yet another form of pseudo-hedged prop trading:

Delta trading has gained momentum in a markets environment in which the mortgage-bond trading business is on the skids and global regulations require banks to set aside expensive capital for loans.

 

Wall Street is counting on trading large volumes of stocks and derivatives to bolster revenue.

 

There is nothing inherently improper about such Delta trading. And many large financial institutions employ this strategy, including Société Générale SA, BNP Paribas SA and Goldman Sachs Group Inc. in Europe and Goldman and Morgan Stanley in the U.S., according to a J.P. Morgan Chase & Co. report.

 

The trading requires state-of-the-art technology systems and can produce as much as $1 billion in annual revenue at top banks, J.P. Morgan said, which noted, "Delta One products in one area of growth in our view, with strong growth in client volumes, resilient margins and untapped potential in emerging markets."

 

But it earlier gained notoriety in 2008, when French bank Société Générale said that Jérôme Kerviel had worked on a Delta One desk while trying to hide $7.2 billion in losses in another rogue trading scandal. Last year, Mr. Kerviel was sentenced to three years in prison.

It is safe to say that in an attempt to scapegoat their stupidity and to cover up for internal bank risk control lapses, regulators will once again lash out at banks (which they themselves saved and in doing so encouraged them to take any and all risk knowing too well they can never fail again), making "Delta One" a thing of the past. In the meantime, we are confident that Wall Street is already hatching plans of "financial innovation" for the next big "revenue" thing: probably called Vega 100 or Gamma 69. In the same time, we also expect the following chart showing the relentless outflows from US domestic equity mutual funds - the truest indication of what the US investor thinks about the stock market - to continue bleeding mutual funds dry until there is nothing left.