Before we start, a quick correction to an ambiguous line in Monday’s intro – I have not changed my mind, the data in the academic paper I referred to reinforced my belief that Mark Johnson’s conviction should be over-turned, not his appeal.
With apologies for that, let’s stay on the subject of everyone’s favourite profession – lawyers!
People are just too quick to run to the lawyers in today’s markets and it’s not cheap – just this week I read that the law firms running the litigation against the banks (inevitably) over the ISDAfix issue were lodging a bill for $151 million – this from a case that garnered $409 million in settlements.
There are so many law suits – and yes, I accept they are largely for historic actions, but the precedent has been set, more will inevitably follow – that I honesty think it is becoming a threat to the market structure of all markets, not just OTC. It is getting to the stage where people will be afraid to trade on a good idea in case it is seen as manipulation, insider trading, front running…the list goes on…when all it is, is exactly what it says on the tin – a good idea.
This stream of consciousness was promoted by an issue I wrote about earlier this year that has come around again – a class action lawsuit brought against a group of traders accused of manipulating the settlement of the Vix contract on Cboe. The exchange was not named in the original action, however it was inevitably going to be involved as only it knew the identity of the traders allegedly involved. Equally inevitably, there is now a lawsuit against Cboe because, the lawsuit claims, it knew about what was going on and did nothing.
This is a tricky one, because the exchange environment is meant to be the most transparent trading ecosystem in the world, where everyone knows what everyone else is doing. In that case you’d have to think that yes, somewhere, someone in Cboe “knew” what was going on. Of course, if it is that transparent, and clearly it is because there have been news reports by the dozen about this, then the plaintiffs themselves probably knew and yet they carried on trading the contract.
The problem is of course, that it takes time to uncover such actions – and by the time they are uncovered the firms concerned have probably made so much money for something that does not at face value look illegal (they were actually trading the underlying so that has to be intention to deal and not spoofing and just as equally they could have lost money on the position they assumed as part of the alleged intent to shift the settlement fix higher or lower) that they don’t care about a sanction.
To use spoofing as an example, on an exchange it is bound to be discovered, but it still happens. Why? Probably because the perpetrators are desperate, stupid, care less, or all three.
The group of traders alleged manipulating the Vix settlement would know the same, but they allegedly carried on anyway – and one reason could be because they didn’t think what they were doing was wrong. They were taking a trading position, on a public venue where their trading and positions were reported, ahead of a publicly-known event.
So these allegations about the Vix are nothing new, indeed Cboe started using AI earlier this year to help detect suspicious trading patterns, although given we all know the contract settlement time I am not sure it needs all that programming power to look at a relatively small window of activity. My Labrador, a well-recognised authority on all things obvious, would know where to look!
This brings me to the lack of responsibility on the part of those bringing the legal action. If the alleged activities of this group of traders was so well known, why continue to trade the product? Make your concerns known to the exchange and stop trading the product. Money talks and the exchange will soon act if word gets out that one of its markets is subject to allegedly suspect trading activity and business drops off.
Instead, everyone runs to the lawyers, which is a shame. A theme of last week’s Forex Network Chicago was how data is enabling people to have much more honest and open conversations. The exchange environment has always been more open than OTC so the data has always been there, so why not use the data and have a difficult conversation with the exchange?
Instead what we have is people running to a law firm with the hope of making a few hundred thousand dollars that they probably didn’t lose on the Vix (which they shouldn’t have been trading anyway if they thought it was manipulated), which in turn leads to bills of the like mentioned above.
It really worries me that we are heading to an environment in which the first instinct in someone who loses money is to cry “foul” and start looking to the lawyers. This is an extension of the “every child wins a prize” culture I have railed against before and it has no place in a consenting adults world. More to the point, this is a market and in a market it is nigh on impossible for there not to be adverse selection – someone, somewhere is going to lose money. It is not a zero sum game, but inevitably someone will miss out and people should go into these markets knowing and understanding that.
I totally accept that if there is a problem in the market it should be fixed, but surely the first place to address the issue is the exchange owner and then the regulators, after all, that’s why they are there isn’t it? To ensure business owners do the right thing and clamp down on bad behaviour?
Running to the lawyers should be the last option, but sadly for too many these days it appears to be the first. Just as much as we need to check up on certain aspects of markets, we also need someone, somewhere, to put a stop to this silliness. If we don’t get it right – and this is above all else a question of appropriate surveillance, then I genuinely fear for where markets will end up.