A few of you have been in touch to say you couldn’t make the Insights call on Tuesday but were keen to hear my thoughts on the Mark Johnson sentence. As flattering as it is to have people want my opinion on it, I really only want to go into brief details because firstly there are things better left said on an informal, off-the-record call, and secondly, you should have been on the call!

Either way, I think I feel the same as many, if not all, in the industry in thinking the punishment handed down to Mark Johnson does not fit the crime. Aside from HSBC paying a fine (and there were clearly cultural issues at the firm, this was not the fault of one man), this is a victimless crime because the bank paid redress to Cairn Energy. Mark Johnson is neither a danger to society, nor in need of re-education and rehabilitation, therefore I believe a fine and a ban from working in financial services would have sufficed.

The reason he is going to jail is because the wider world outside of foreign exchange, wants an example to be made – there have been too many instances of financial misbehaviour over the last 10 years – and the judge clearly wanted to put a deterrent in place.

A two year jail sentence has delivered the example, deterrent and message that the outside world wanted sent. It’s horrible that Mark Johnson has to become a poster child or an example in this fashion, but the sad fact is that someone was going to get it – it just happened to be him.

A point I made on the call, however, was that I didn’t want people accepting that others are lucky because “it could have been anyone…” It couldn’t have been anyone because although I really don’t like the sentence handed down, we have to accept that Mark Johnson was found guilty by a jury of his peers of lying to the client and orchestrating a number of HSBC staff front running the order. We don’t all do that – we may all pre-hedge large orders, but, and this is the important bit from the judge’s summary, that is not necessarily front running.

I say that’s the important bit from the judge’s summary because to me it is hugely significant that he does not refer to pre-hedging in his summary at any time – in spite of a couple of days of the trial being taken up in discussing just that practice. Instead, the judge focuses heavily on the number of positions held around the bank ahead of the order and the deceit – he highlights the abuse of trust that took place and Mark Johnson’s failure, given he was entrusted by Cairn Energy, to fulfil his fiduciary duty to the client.

So this is a personal tragedy for Mark Johnson and his family, and for the rest of the industry, I think it is important that every dealing desk has his words engraved somewhere for all to see. In the summary, discussing the need for a deterrent, the judge noted, “any amount of prison time is a serious amount of prison time”. 

I feel for Mark Johnson, but also believe this is probably the best outcome he could have realistically hoped for given the mood in the wider world towards financial markets misconduct – the GFC was only 10 years ago.

I mentioned on the call that several of you had been in touch suggesting that this means the members of the Cartel due to stand trial later this year in the US are also going to jail. I don’t necessarily agree, although nobody knows really until we hear the two sides’ cases. 

A key element of the conviction was the jury’s belief that Mark Johnson lied to the client about the bank’s activity in sterling in the run up to the order being executed – I am not aware of any instance of a member of the Cartel actually talking to clients and misleading them. Their alleged crime is colluding to move the market, something they did successfully on occasions, and failed miserably on others and as such the trial should take a very different route. It is not a forgone conclusion, therefore that the members of the Cartel will follow Johnson to jail.

One final aspect from Tuesday’s call that I want raise to a broader audience is the role of the FX Global Code and data. I had a very interesting chat with Jason Chauval from NEX Markets about the possibilities of data and it became clear that some liquidity consumers are not as engaged with the potential of data analytics that their liquidity providers are.

This is endemic of a wider problem with the buy side, as witnessed by the fact I have so many people talking to me about the reluctance of the buy side to embrace the Global Code in any meaningful manner. This is a serious issue to my mind because while customers will quite rightly say they weren’t directly involved in the wrongdoing – they are 100% involved in market quality. As was pointed out, the liquidity consumer can be as, if not more, disruptive than an LP, and as such they should be committed to the Code, and also should understand the potential value of the data. Sometimes the customer is not right – in fact sometimes they are the root cause of the problem.

I am not for one minute suggesting that Cairn Energy was the problem in the Johnson case, indeed the firm seemed engaged enough to ask questions about price action around the Fix, but this does not mean that customers are sufficiently engaged.

The problems we have faced that have culminated in one of our own going to jail are the result of a lot of issues; market structure change, the pressure to make more and more money, the growth of the Fix as a mechanism andthe behaviour of certain customers.

The Global Code, assuming we can achieve broader adoption and understanding of why everyoneneeds to adhere, is a big step forward, but as we discussed on Tuesday, a good data analytics framework, indeed the correct use of data, can also go a long way to avoiding a repeat of last week’s sad events.

I am taking a short break, this column will return on May 17.


Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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