HSBC fined for frontrunning – good

No, they really shouldn’t have done this:

HSBC said the conduct which led the Department of Justice to issue this second DPA took place between 2010 and 2011 and, according to the document, relates to its handling of a client order by Cairn Energy and financial services it provided to another unnamed company.

The Cairn Energy case included Mark Johnson who, in October, was found guilty of defrauding Cairn over a £3.5bn client order. A jury ruled that he had driven up the value of the pound against the dollar by buying sterling prior to the transaction in order to make a bigger profit for HSBC.

Frontrunning. It’s not that they’ve screwed the market, it’s that they’ve screwed their own client.

HSBC has agreed to pay just over $100m (£72m) in penalties to settle a US Department of Justice probe into currency rigging.

Currency rigging isn’t really right, not the correct description, but a decent fine is.

5 comments on “HSBC fined for frontrunning – good

  1. It’s like the Libor rigging. Essentially it’s a nil sum game, but idiots like Peston claimed a few basis points either way ‘affected millions of people’s mortgages” in order to ramp up the anti banker rhetoric and usefully allow politicians to dodge blame for their ineptitude and pull in billions of fines from shareholders. (See Obama over “British Petroleum” and every foreign bank that was a threat to JP Morgan and Goldman Sachs)

  2. I’m not sure why this is being called “market rigging”. Surely, “insider trading” was what was done. The currency was bought in advance of Cairn’s purchase order being executed. Which would, itself, presumably be of a volume to move the market. The trader acted because he was privy to the information that the Cairn transaction was in the pipeline. And the bank would end up long of pounds. Where did it unload the pounds? To Cairn at the then market price?
    Simple market rigging tends to be a zero sum game. If you move the market up, by buying, you’re going to move the market down when you sell to clear your position. You end up back where you started.

  3. It’s not that good, in that the people who did it get off Scot-free, and the company as a whole doesn’t.

  4. “Which would, itself, presumably be of a volume to move the market. The trader acted because he was privy to the information that the Cairn transaction was in the pipeline. And the bank would end up long of pounds. Where did it unload the pounds? To Cairn at the then market price?”

    The very definition of front-running.

  5. Well, no Ducky. I’d have said “frontrunning” implied buying in a market before the client enters it. This raises the price & the client’s trades firm the price up still further. The dealer then closes his position, all other things being equal, softening the price to the level the client went in. The dealer’s selling whilst the client’s buying but the dealer’s not selling his stock to the client. All trades are in the market.
    Buying in the market, then selling to the client at a higher price without disclosing would be straight fraud One wouldn’t be acting as the client’s agent but one’s own agent.

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