Consider the following extract from a âfinal noticeâ, issued by the FSA on Wednesday as the UK regulator slapped a lifetime ban and a £100,000 fine on one Andrew Kerr, a commodity broker at Sucden Financial:
4.24. The 600 lot order was placed by Client A with Mr Kerr during a call that commenced at 12:06 and terminated seconds after 12:30. During the course of this conversation:
4.24.1. Client A indicated to Mr Kerr that he wished to buy a large amount of coffee futures shortly before 12:30: âon the close, just before the close, lift everythingâ;
4.24.2. Client A discussed with Mr Kerr how, by doing so, he hoped that the holders of the coffee put options would cover their positions (by buying coffee futures) and that he could then sell coffee futures as the price rose, before then exercising his own coffee put options;
4.24.3. Client A stated that the timing of the trade was important: ââ¦we cannot afford to have any F-ups on the timing today okâ;
4.24.4. Client A asked Mr Kerr how many coffee futures he would need to buy in order to position the price above $1,750 at 12:30: âif I want to get this thing to finish through 50 [$1750], how many lots do I need to buy?â;
4.24.5. Mr Kerr advised that he would need to buy 330 coffee futures in the next four minutes to achieve this;
4.24.6. Client A then instructed Mr Kerr to buy 600 coffee futures up to a price of $1,757 at or shortly before 12:30, making it clear that his intention was to increase the price: âOk I want you to on the close, this is the idea, that it finishes obviously higher than 1750. I want you to buy 600 lots of September up to 1757â;
4.24.7. Mr Kerr called a speaking clock so that both he and Client A could listen to the clock count down to 12:30;..
We think the regulator wants us to be shocked and disgusted by this, but as Reutersâ prime commods-watcher John Kemp pointed out in a column on Wednesday, this sort of manipulative behaviour is par for the course:
While Kerrâs behaviour was unusually blatant, and unfortunately for him captured on tape in unguarded language, using large volume trades to support or batter market prices close to daily or option settlements is common practice across commodity markets.
But who is this âClient Aâ and why is he not being hanged here, rather than the hapless broker? According to the dialogue above, it is the client that appears to be the real market gangsta here, not Mr Kerr.
We can only assume that action against Client A is still underway (and/or being resisted by the alleged manipulator). Mr Kerr chose to take the rap in exchange for a reduced fine under the FSAâs accelerated disciplinary scheme.
A further question: does making all this detail on the case public prejudice Client A?
Probably, but who cares? The FSAâs got its own institutional skin to save and every scrap of evidence that itâs cracking down on perceived market abuse helps that cause.
Sod the collateral damage.
http://ftalphaville.ft.com/blog/2010/06/02/249881/the-exposed-case-of-client-a/
4.24. The 600 lot order was placed by Client A with Mr Kerr during a call that commenced at 12:06 and terminated seconds after 12:30. During the course of this conversation:
4.24.1. Client A indicated to Mr Kerr that he wished to buy a large amount of coffee futures shortly before 12:30: âon the close, just before the close, lift everythingâ;
4.24.2. Client A discussed with Mr Kerr how, by doing so, he hoped that the holders of the coffee put options would cover their positions (by buying coffee futures) and that he could then sell coffee futures as the price rose, before then exercising his own coffee put options;
4.24.3. Client A stated that the timing of the trade was important: ââ¦we cannot afford to have any F-ups on the timing today okâ;
4.24.4. Client A asked Mr Kerr how many coffee futures he would need to buy in order to position the price above $1,750 at 12:30: âif I want to get this thing to finish through 50 [$1750], how many lots do I need to buy?â;
4.24.5. Mr Kerr advised that he would need to buy 330 coffee futures in the next four minutes to achieve this;
4.24.6. Client A then instructed Mr Kerr to buy 600 coffee futures up to a price of $1,757 at or shortly before 12:30, making it clear that his intention was to increase the price: âOk I want you to on the close, this is the idea, that it finishes obviously higher than 1750. I want you to buy 600 lots of September up to 1757â;
4.24.7. Mr Kerr called a speaking clock so that both he and Client A could listen to the clock count down to 12:30;..
We think the regulator wants us to be shocked and disgusted by this, but as Reutersâ prime commods-watcher John Kemp pointed out in a column on Wednesday, this sort of manipulative behaviour is par for the course:
While Kerrâs behaviour was unusually blatant, and unfortunately for him captured on tape in unguarded language, using large volume trades to support or batter market prices close to daily or option settlements is common practice across commodity markets.
But who is this âClient Aâ and why is he not being hanged here, rather than the hapless broker? According to the dialogue above, it is the client that appears to be the real market gangsta here, not Mr Kerr.
We can only assume that action against Client A is still underway (and/or being resisted by the alleged manipulator). Mr Kerr chose to take the rap in exchange for a reduced fine under the FSAâs accelerated disciplinary scheme.
A further question: does making all this detail on the case public prejudice Client A?
Probably, but who cares? The FSAâs got its own institutional skin to save and every scrap of evidence that itâs cracking down on perceived market abuse helps that cause.
Sod the collateral damage.
http://ftalphaville.ft.com/blog/2010/06/02/249881/the-exposed-case-of-client-a/
