A New Twist On An Old Investigation? FX Options Brokers Still Under Scrutiny

An investigation first
reported by Profit & Loss nearly
a year ago
has returned to the spotlight with a report the US inquiry into spoofing by the three major
inter-dealer brokers has been broadened.

According to a report from Bloomberg News, citing “people familiar with the situation”,
TFS-Icap, the joint venture between Tradition and Icap, Tullett Prebon, and
BGC’s GFI unit are all being investigated by the CFTC and New York Attorney
General Eric Schneiderman for
posting fake bids and offers, sharing information inappropriately and attempts
to rig or influence auctions in currency options.

The report
gives few details of the ongoing investigation and a senior broking source is
skeptical over parts of the report, suggesting that auctions in FX options are
“very rare” and only used in “one or two” local markets.

“I’m not
sure how the US can investigate auctions in FX options, if it is doing so,
because the mechanism is rarely – if ever – used,” the senior broking source says. “I also
think there may be a misunderstanding of how the market works when it comes to
allegations of spoofing because most brokers start the day working out the
“run” to give their customers an indication of where they think the market it.”

Another broking source, however, believes there may be something to the allegations, noting rumours of problems in the Latin American market over the auction process some years ago.

The source notes that the process was very much like a competitive RFQ process whereby one party posts an interest – or more likely gets the broker to post it – on the broker’s system, and counter bids or offers are invited. The source cautions, however that very few brokers now use that methodology, “because of the problems in Latam”. The source declines to provide details.

Although there may be potential issues for the broking firms over historical practices, there remain concerns that the authorities properly differentiate indicative prices from spoofing. “If the
brokers don’t give their customers an indication it’s very hard to get the
market started, because people are reluctant to price until they are confident
in their levels,” the senior broking source suggests. “FX options as a market is too small to wait
for people to express an interest through a firm order, it needs market makers
and those market makers rely upon data from their brokers.”

The source
accepts that there may have been instances of brokers “flying” bids or offers
with the intention of getting firm prices in certain markets but believes the
practice has been stamped out. “All the brokerage firms investigated this,
there has been disciplinary action taken and I’ll be surprised if it still
takes place. And again, we need to ensure those investigating understand the
nuance between giving an indicative rate and deliberately flying in prices.”

This is a
point raised previously
in Squawkbox and indeed the allegations of fake bids and offers could be the
result of a misunderstanding, however, according to the Bloomberg report, the US authorities have evidence from a number of
witnesses. Equally as serious for the industry is the allegation of the inappropriate
sharing of information. With the banking world only starting to recover from
the hit it took in the form of billions of dollars in fines over the same
transgression, there are concerns the broking world could not withstand a hit
on a similar scale.

“Any fines
won’t be on the scale of those handed out to banks but they will still be
sizeable relative to the businesses so there are real concerns over the
viability of the IDBs if they are found guilty,” the senior broking source says. “In
the UK, the FCA fined RP Martins over Libor but found the firm couldn’t afford
it and had to decide whether to bankrupt the firm or reduce the fine.

“The FCA
accepted a reduced fine then but this is the US, which has taken a tougher line
throughout, so there have to be concerns.”




Colin Lambert

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