PrefBlog

The war on markets continued today with the arrest of Mark Johnson, HSBC’s global head of foreign exchange cash trading in London:

The two allegedly conspired to take advantage of inside information about an unidentified company’s plans to sell part of its stake in an Indian subsidiary, according to the complaint. The client was Cairn Energy Plc, which was selling the unit to Vedanta Resources Plc, according to people with knowledge of the transaction. HSBC was hired to trade about $3.5 billion in proceeds of the sale to pounds. Johnson and Scott began buying pounds in the days before the transaction, anticipating that they would cause the price of pounds to spike — a practice known as “ramping” — then execute the transaction, making the pounds they’d bought earlier more valuable, according to the complaint.

Scott and Johnson — his supervisor at the time — told the client the deal should take place at 3 p.m. “so there’s an element of surprise” to get a better rate, according to the complaint, which quoted from recorded phone calls and messages between the two and their client. There was less liquidity at the 3 p.m. fix than the one at 4p.m., making it easier to manipulate, though they told their client they were about the same.

They and other traders they directed ramped the price, sending the pound to its highest in two days at 2:56 p.m. London time. When Scott told Johnson the client was still going ahead with the full transaction despite the spiking price, Johnson said “Ohhhh, f***ing Christmas,” according to the complaint. In the end, HSBC and the men’s internal accounts reaped about $8 million from the front-running, according to Brooklyn U.S. Attorney Robert Capers.

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Well, the main thing that sticks out in this story to me is the fact that whoever it was at Cairn Energy who negotiated this deal is a complete idiot. Converting $3.5-billion into pounds in one trade at one specific time? Didn’t it occur to anybody to think, gee, this is kind of a big trade? It also looks as if this idiot who somehow managed to be in charge of $3.5-billion has no idea whether the guys at HSBC are fiduciaries or counterparties – and the idiot had a responsibility to know that.

The second thing to jump out at me is the question of what the authorities suggest HSBC should have done. They were told to convert $3.5-billion at the 3pm fixing, so they did. As they are not as stupid as the moron at Cairn Energy, they laid off their end in pieces. Does anybody care to guess in the comments what the execution price of the trade would have been if the entire order had been placed electronically as a market order at 2:59:59?

This entry was posted on Wednesday, July 20th, 2016 at 11:42 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.