Information is a valuable commodity for sales traders

PUBLISHED : Sunday, 01 July, 2012, 12:00am
UPDATED : Sunday, 01 July, 2012, 12:00am


Barclays traders routinely co-ordinated with counterparts from at least four other banks in an attempt to move interest rate benchmarks, according to documents released on Wednesday by US and British market watchdogs.

Bloomberg, SCMP, June 29

In the 1980s I put in a stint with Morgan Stanley for several years and I recall being in the Tokyo dealing room one quiet morning when the chief trader in Japanese equities was feeling a little uncertain about the market's direction.

Suddenly he stood up at his desk on the traders' dais in the dealing room and bellowed out to his sales traders that he was a buyer of Honda Motor or Fujitsu or whatever it was.

Instantly the traders got on their phones and the client offers of stock began to flow in. This continued for a few minutes and then the chief trader stood up at his desk again and announced that he was a seller of the same stock.

Back to the phones went the traders looking for bids until the chief trader called a halt to the exercise. He had discovered what he wanted to know. The speed and size of the offers that he lifted relative to the speed and size of the bids that he hit for the same stock told him which way the market was moving.

You may say it was a costly way of finding out this trend but here is the truth of the matter: it is the only truly reliable way of doing so. Information is a valuable commodity in financial markets. If you want it you pay for it.

The London Interbank Offered Rate (Libor) is a benchmark of US dollar interest rates across a range of different maturities. Many lenders refer to it to establish their own interest rates to customers. I hold a fixed income instrument that pays me an interest rate of six-month Libor plus half of a percentage point.

Libor is established by a survey of 18 banks conducted on behalf of the British Bankers' Association in London and then published before noon every day.

Do you see the flaw in this arrangement?

Yes indeed, someone here purports to offer you valuable financial information for free. It is therefore likely to be less than fully reliable information. It contravenes the law of the universe that in financial markets you can only be sure of the truth if you pay for it.

What apparently happened in this so-called scandal is that some crafty traders at Barclays and a few other banks in the Libor survey devised a derivative instrument that would allow them to take positions against the interest rates they reported to the Libor survey agents.

Be surprised, if you must, that someone would dare to commit this 'crime'. Be shocked. I'm not. This is what happens when artificialities are introduced to a financial market. Another market rises to intermediate them.

I have no tears to shed for the bankers who believed that they could just consult a display screen to tell them at what rate to price their money and not have to pay a cent for this service other than to Bloomberg or Reuters. If you think you've been fooled, fellas, you only fooled yourselves.

My favourite story on this score was about 30 years ago when one of the London bookmakers decided to offer a daily bet on the Hang Seng Index, 20 points off the previous day's close and you were in the money if you bet the right way.

At the time I was with a broking firm that then dominated the market. Our man in London called up his four biggest clients every morning and, if they were all pulling the same way, they would double the size of their orders they were putting into Hong Kong and one of them would be selected to make the bet with the bookie.

They cleaned that bookie out of Hang Seng Index bets in just a few months and our man then told the boss that we should really base our European office in Geneva. His tax rate would have killed him if he had stayed a British resident that year.

Bang it into your head. Information isn't free in financial markets. You must pay if you want to be sure.