HSBC Top Manager Arrested Over Foreign Exchange Fraud Claims

in #trading5 years ago

HSBC’s chief of foreign exchange cash trading has been arrested in New York on a charge of fraud. This relates to allegations of front running on a $3.5 billion foreign exchange deal for what is thought to be Cairn Energy CRNCY +% as it converted the sale proceeds from the sale of its Indian subsidiary to Vedanta into sterling. Amusingly, this same transaction is the basis of the case between Cairn and the Indian taxman over whether the company owes Indian tax on this deal.

It’s worth detailing what the actual allegation is, this “front running” for those not entirely au fait with financial market terms. Obviously, any large bank is going to have all sorts of orders come through its trading room. The bank is free, whether we’re talking about stocks, bonds, foreign exchange or whatever, to buy and sell whatever even when they know what clients are going to want them to do in the near future.

However, “front running” is the idea that you know that there’s a big transaction coming. One large enough that it will change market prices. And then you go and buy ahead of that order, then keep what you’ve just bought. In comes the large transaction, prices move and you now can sell your holding of whatever it is at the higher price. You profit from your knowledge.

US prosecutors have dramatically upped the stakes in their battle against foreign exchange market riggers with the arrest of a top HSBC trader in New York, who is accused of conspiring with senior managers to rip off a big client.

Mark Johnson, 50, head of global foreign exchange cash trading at HSBC, was arrested by FBI agents at JFK airport as he waited to leave the United States. He has been charged with being part of a “front-running” currency transaction scheme that made $3 million for the British bank.

We all need to be careful here – of course this is an allegation, a charge, not something that has been proven. But also we need to be careful because front running is a very specific point. If I know that someone is about to launch a bid for a company and I got that information out on the open market (that is, I’m not insider trading) then I’m perfectly at liberty to go buy the stock and wait for it to rise as the bid comes in. That’s not front running. However, if the people launching the bid are my clients, and I’m going to be organising the bid for them, then I go buy then that is front running and that’s very bad indeed.

Not so much because it’s fraudulent trading (which is the specific charge here) but because markets won’t work if people do this. Think of it as being analagous to perjury in a court room. Hey, people lie all the time about all sorts of things, why does the legal system come down so hard on those who lie in court? Because the court system just won’t work if people lie in it. Similarly, contempt of court is a serious issue – court systems won’t work unless we all agree that we’ll accept their rulings.