Trader Describes How Dishonesty Pays in Finance, Big Time

Yves here. It may seem like a “dog bites man” account to describe yet again how traders are fixated on their bonuses, often have tawdry personal habits (cocaine, whores, flashy cars) and have no compunction about leaving rubble in their wake, be it customers or the firms for which they work.

However, it’s one thing to hear it from outsiders or people who’ve managed to spend some time on a dealing room floor, and another to have someone in the industry describe what goes on. It’s almost as if two veils need to be pierced. The first is that behavior that most people would regard as predatory and pathological is cultivated and celebrated in big capital markets firms (ones with large trading and investment banking operations). And when outsiders get a dim perception of how things work and are properly incensed, the insiders get astonishingly angry and defensive (the vehemence of the response is proof that on some level they actually do know what they are doing is wrong but have built all sorts of denial mechanisms and narcissistic responses to protect themselves from that knowledge). The second veil is it’s hard for non-bankers to believe that the conduct is as deeply, pervasively as bad as it is. This is one of those cases where a difference in degree is a difference in kind.

I strongly recommend you read this post in the Guardian, ‘The most dishonest bankers walk away with the most money‘, in full. The opening section is the least interesting in that it gives the juiced up description of what traders like about the business, which is the sense of power, of making trades and seeing the market impact.

One part I thought that readers would find instructive relates to something I discussed in ECONNED, which is how the producers at financial firms (people who are paid on some measure of revenues) don’t merely lack loyalty to their employers, but actively seek to take advantage of them. They regard a firm at best as a place out of which to operate. From the Guardian:

“It’s a dog eat dog world. But at the same time it’s the traders versus the bank. This is why I think barrow boys do so well as traders; they seem to have some sort of sense of collaborating against the system for monetary gain. Even the head of markets, the guy in charge of all the traders, seemed mostly interested in maintaining the status quo. He is on the side of the traders, against the bank. Management consists of traders who have worked their way up. What kind of people do you think they are?….

“In the end the bank is like a shell. You need a place to trade from, this is how we saw our bank. Sometimes an entire team can be poached and go from one bank to another. There’s no loyalty either way. And the top at your bank has no idea what’s going on, how could they? Why would anyone tell them what’s going on?…

“I do wonder why there seem to be so many somewhat dishonest people in the bank, and why the most dishonest are often the ones to walk away with the most money. I suppose that on the way to the top there’s negative selection and most normal decent people conclude: this is not worth it or I am not doing this for money.”

He gives one example of how traders game bonuses:

“For instance when someone was made redundant a remaining trader would do a deal between his book and that person’s, creating a profit in his book and a loss in that of the person leaving.

“How that works is the guy leaving needs his positions [outstanding trades] closed. But he isn’t able to check whether the rates are reasonable at which these positions were transferred to another trader’s book. In any case he can’t do anything about it (when leaving or made redundant you have to leave instantly). Then the remaining traders will complain about the guy being a crap trader.”

And, quelle surprise, confirms that customers are there to be fleeced:

“Of course traders are constantly inquiring across the bank: what’s happening? What are our big clients like institutional investors doing? Then they ‘front run’ those investors; buying ahead of them so when the price rises due the subsequent buying, they pocket the difference.

“Chinese walls [between deal making, asset managing and trading bankers]? Bullshit. We could simply log on to our system and see what was happening and what they were doing all the time.

“If there is a lot of money at stake then people will not adhere outside rules and they will evade Chinese walls.”

And as if the regular reports of how municipalities and even Harvard lost big time on swaps and derivatives makes the news (corporations are usually better able to hide the dead bodies) aren’t warning enough, this trader stresses that those guys in fancy suits are not your friend:

“My advice to people dealing with the financial sector is: never buy anything that’s complex. Because the more complexity the more opportunities there are to screw you over. I just can’t get my mind around how banks can still call clients in the corporate world and say, look we’ve got this great idea that’s going to make you a lot of money. I mean, what are they thinking? Nobody in the City can be trusted because they don’t work for you, they work for themselves.”

The piece has been cross-posted from Naked Capitalism with permission.