The New York State Department of Financial Services (DFS), has fined Credit Suisse $135m for ‘Unsafe, Unsound and Improper Conduct’.
The transcript of the order makes for depressing reading, when we see the extent of the improper conduct and abuse of information that went on. However it does show that the regulators are getting better at joining the dots and pull together a compelling case which sends another strong message to the market. Moving forward I am therefore encouraged that with the global code of conduct, increased monitoring and surveillance, the senior managers regime with risk of huge fines and imprisonment that we are likely to see less abuse of this type in the FX markets, at least at the business wide level.
The consent order published this week states that:
Between 2008 to 2015, Credit Suisse consistently engaged in improper, unsafe, and unsound conduct, in violation of New York laws and regulations, by failing to implement effective controls over its FX business.
Although Credit Suisse internal policies state that:
“Confidential or Proprietary Information: Employees should assume that all information about customer orders and transactions is confidential and or proprietary.”
“Employees are prohibited from front-running (trading ahead of customer or Firm transactions).”
Nonetheless, the order includes the following improper conduct:
- Inappropriate sharing of information with other global banks which may have led to coordinated trading, manipulation of exchange rates, and increased bid/ask spreads offered to customers in Credit Suisse’s foreign exchange business. These efforts were directed at maximizing profits or minimizing losses in Credit Suisse’s trading book, to the detriment of customers and a competitive marketplace.
- Front-running customers’ limit and stop-loss orders (Apr 2010 to Jun 2013) through application of an algorithm that appears to have been designed to trade ahead of customer’s orders and increase profits.
- Improper practices involving the use of its electronic trading platform known as “eFX.” (Jan 2012 to Dec 2015). Specifically, the DFS Investigation determined that Credit Suisse:
- (1) improperly employed a delay function when determining whether to fill customer orders, known as “Last Look,” on all clients’ orders, to increase the Bank’s profits at the expense of a transparent, competitive model;
- (2) failed to adequately disclose to its clients that certain trades were rejected on the basis of a “Last Look” functionality, and instead stated that such rejections were due to an “error,” thereby potentially misleading Credit Suisse clients into believing there was a technical error, as opposed to an intentional rejection of an order so the Bank could avoid losses
- (3) failed to implement adequate controls to ensure its FX trading business and sales practices complied with law
The order lists countless transcripts from chat rooms and emails detailing how sales, traders, eFX and ecommerce people were using information and technology at the expense of their clients, here are just a few comments:
Front running orders: On back of a large M&A transaction, a trader disclosed in chat room the following information in order to facilitate front running of a customer order:
“I think there’s some lhs2 [left hand side] action today at the fix on the back of tht massive m+a . . . massive caveat, info is from sales desk . . . but 4 o clock. .. . 16 yrds . . . something to do with the equity leg is going thru today . . . that’s the reason they saying the spot will be done.”
Implementing changes to last-look functionality to act as profit centre.
After introducing Last Look, eFX senior executives began exploring whether this function could serve as a profit center – and not just a defense against toxic flow from high-speed trading customers. Thus, the scope of the use of Last Look changed in early 2013 when – under pressure to increase profits – senior executives in Credit Suisse’s electronic trading
business determined to expand Last Look to all eFX customers. They acted to increase profits, without regard to whether application of Last Look was reasonably based on minimizing losses associated with latency arbitrage/toxic flow.
In Jan 2013, Credit Suisse’s Head of Strategy wrote to the Head of eFX Trading and others:
We should think about whether we might want a small amount of deal acceptance (last look) for all FIX clients by default. . . . Right now we typically only use deal acceptance when there’s a problem but I think it would be worth doing it as standard and having it turned on from day one. We should . . . instead use our rejects to improve P&L. I’m not suggesting going last look crazy I just think there’s no need to have a 100% fill rate
for API clients. With most there’s an ‘acceptable’ reject rate and by not making use of that – or wasting it by rejecting trades for non-P&L-impacting reasons – we’re leaving money on the table (or at least giving up a free option.)
Some tried to prevent the changes. Here a leader on the eFX Development Team replied:
Last look was introduced for a very specific purpose – to stop latency arb by introducing a short delay in acceptance that covers the difference between our market data latency
and that of HFT [high-frequency traders]. . . . Changing the purpose of the last look to increase profitability will also require a change in parameterization. . . . What would be our policy in communicating this to clients? If you’re at all uncomfortable with a full and frank disclosure of this policy, I’d recommend you do not proceed with it.
Despite that, he was overruled and the changes were implemented.
Full transcript here