As reported on Friday [8], the most recent example of a breach in informational Chinese walls was confirmed at Bloomberg, where it was discovered that reporters have the same degree of client surveillance as workers on the API/terminal side. The reason why this is problematic is that since Bloomberg is a monopolist in the financial terminal industry, with such competitor attempts as Reuters' Eikon [9]being massive failures, virtually every finance professional needs a terminal (even if the rate of sale of such terminals is slowing down as a result of the ongoing financial margin headaches [10]). Which means that Bloomberg journos, an increasingly competitive service to the likes of Dow Jones, Reuters and AP, may have had an unfair advantage when it comes to tracking their "pray" - Bloomberg's own clients.
According to Reuters, such client surveillance may have been what tipped of Bloomberg about Bruno Iksil's behavioral patterns while at JPM: "At JPMorgan, the bank's public relations staffers also fumed to one another last year that reporters called repeatedly to inquire whether Bruno Iskil, the "London Whale" trader who was part of a team that lost more than $6 billion in losses, had left the bank because he had not logged onto his terminal in several days, a source with direct knowledge of these discussions said. JPMorgan did not formally bring the matter to Bloomberg's attention, the source said. Bloomberg said it had no record of a complaint."
And now, following the original Goldman complaint which Bloomberg said ended such informational commingling, it is the turn of the Treasury and the Fed to complain. Again from Reuters [11]:
Bloomberg LP customers, including the U.S. Federal Reserve and the U.S. Treasury, were examining on Saturday whether there could have been leaks of confidential information, even as the media company restricted its reporters' access to client data and created a position to oversee compliance in a bid to assuage privacy concerns.
A Fed spokeswoman said on Saturday that "we are looking into this situation and have been in touch with Bloomberg to learn more." A source briefed on the situation said the Treasury Department was looking into the question as well.
Feigned surprise at the degree of information Bloomberg has on all its clients - Fed and Treasury included - aside, what is left unsaid in all of this is the simple question of just why is it material information what the Fed, arguably an entity that at least in a normal world should not have any day to day trade interactions with financial markets, looked up on its trading terminal.
Of course, the Fed's less than joyous response to being tracked externally via Bloomberg is well known. It was our little expose on Kevin Henry's activity status in late 2012 [12] that caused him to go from "green", or reporting his presence, ot "gray", or invisible.
Kevin Henrgy "Green." Also, lots and lots of traders. Not so many economists.
[13]
Kevin Henry "Gray" (following this [12]):
[14]
That said, not even we have any idea just which Equity, FX or Corp screens Henry, and the rest of the Fed staff were accessing. Or what stocks the NY Fed analyst/trader was engaged with. Only Bloomberg does.
For the sake of transparency, we hope that since Bloomberg-Steagall is very unlikely, just as it is unlikely that the big banks' trading and deposit business will ever be broken up again, at least not before the great reset, that at least Bloomberg will disclose what, if any, covert surveillance it was conducting on the Fed, and specifically which stocks the NY Fed's trading desk was daytrading.
Because in a world of the Russell 2000 trickle down wealth effect, we could all use a stock tip.
Finally, for everyone shocked, shocked that a firm can abuse client informational arbitrage, and even trade against its clients, we refer you back to our 2009 piece "Is Goldman Legally Frontrunning Its Clients [15]?", or better yet, the January 2010 piece, "Goldman Admits To Frontrunning Clients Through Its Prop Desk [16]":
The topic of Goldman frontrunning clients using its prop desk, which has long bothered Zero Hedge [15], and which in the past received Goldman's vehement refutation, seems to have resurfaced, and to have proven our initial speculations correct. Jane Lattin, assistant to Thomas Mazarakis, head of fundamental strategies, sent out an email to clients earlier, notifying them that the firm in the past has traded ahead of them in its Fundamental Strategies Group, aka its Prop Trading desk, which is, by definition, frontrunning: "The Fundamental Strategies Group is a group of cross-capital structure desk analysts employed by our Securities Divisions to assist our traders. They develop Trading Ideas in conjunction with traders. We may trade, and may have existing positions, based on Trading Ideas before we have discussed those Trading Ideas with you. We may continue to act on Trading Ideas, and may trade out of any position, based on Trading Ideas, at any time after we have discussed them with you. We will also discuss Trading Ideas with other clients, both before and after we have discussed them with you." This answers our repeated queries from July as to whether Goldman is legally front-running its clients for its own prop positions.
Full Goldman letter:
Dear client,
We may from time to time discuss with you Trading Ideas generated by our Fundamental Strategies Group. As part of our commitment to managing conflicts of interest appropriately, this message is to explain how the Fundamental Strategies Group interacts with other parts of our organisation and how that impacts on the Trading Ideas.
The Fundamental Strategies Group is a group of cross-capital structure desk analysts employed by our Securities Divisions to assist our traders. They develop Trading Ideas in conjunction with traders. We may trade, and may have existing positions, based on Trading Ideas before we have discussed those Trading Ideas with you. We may continue to act on Trading Ideas, and may trade out of any position, based on Trading Ideas, at any time after we have discussed them with you. We will also discuss Trading Ideas with other clients, both before and after we have discussed them with you.
You should not consider Trading Ideas as objective or independent research or as investment advice. When we discuss Trading Ideas with you, we will not be acting as your advisor (including, without limitation, in relation to investment, accounting, tax or legal matters) and the provision of Trading Ideas to you will not give rise to any fiduciary or equitable duties on our part. We will not be soliciting any action based on Trading Ideas and it is your responsibility to seek appropriate advice.
Any opinions that we express when we discuss Trading Ideas with you will be our present opinions only and we will not have any obligation to update you in the event of a change of circumstances or a change of our opinions. We prepare Trading Ideas based upon information that we believe to be reliable but we make no representation or warranty that such information is accurate, complete or up to date and accept no liability, other than for fraudulent misrepresentation, if it is not.
If you have any concerns about any of these matters, please do not hesitate to contact us.
Kind Regards
Jane Lattin
Assistant to Thomas Mazarakis – Head of Fundamental Strategies
Of course, following the imposition of the Volcker Rule a few months later, which has sought to eliminate precisely this kind of orderflow frontrunning behavior, this has now become a "moot point"... surely.