Not so long ago, in the Moscow’s financial institutions, it was not that unusual to see a back-office employee sitting right next to an FX or rates trader, filing the intraday tickets on a buy low/sell high basis. He or she would then stamp the papers with the time most beneficial for the bank.
Provided that each ticket already had a 2-5 pip client commission on a 20% spread, it was a no-brainer that some filthy traders could make bank. Naturally they were often working in cooperation with cash-rich clients, making them even more cash-rich by giving them their fair cut in Louis Vuitton suitcases.
It was a fairly normal occurrence for a Russian entity to openly “park” its PnL to some Cyprus- or Gibraltar-incorporated vehicle, or wash a trade through some London-based LLC, whose beneficiary owner might well be the very same trader at the local bank.
Sales people and traders in London would gladly assist these requests. They would strive to get as much liquidity as possible from the rough traders in Moscow to their respective employers in London, Singapore or New York, which was (and still is) the reason such jobs still exist.
The Bloomberg chats back in the day would be filled with shameless requests (though in somewhat coded jargon): for example, one trader asking another to front-run a big state corporation buying ruble, rupee or peso at the beginning of the tax period in the respective country. Actions like these could often crash local fragile markets, making some rough trader feel like the new George Soros, breaking the Bank of England in the early nineties. Their only motivation was to make as much profit as possible for their employer, accompanied by the hope (often a delusion) of being paid a lucrative bonus at the end of the year, without giving a damn that his actions could have just caused a rise in the unemployment rate in a given region.
It was a logical step for the EU and USA to tighten the financial markets regulations, but not necessarily a very timely one.
The story I personally witnessed a few years ago in a subsidiary of a western bank in Russia (which provided the background for my upcoming novel “Snow Job. The Great Game”) would not have happened had the reporting and control functions not been blinded by excessive revenues and by top management’s support of insider dealing, front running and other types of market abuse. The traders responsible for these activities are long gone from the bank, and are far from struggling for money.
Even though it was obvious what exactly was going on (with anonymous reports submitted to head office and the FCA), the internal investigation has only recently begun. Despite so many people being aware of such costly cheating, no one is being held responsible, and I doubt anyone ever will be.
And this is only one example.
People who do such things are able to justify it to themselves because “everyone else does it”. And the system reinvents itself. Those who were juniors ten years ago are now doing what their predecessors did to support their must-have lavish lifestyle that comes with being in front office banking. Does anyone give a damn about local economies, or what kind of world we are going to leave to our children? (Are you kidding me?)
I hope to be proved wrong, but in my view the new regulations will most likely only force them to come up with more sophisticated ways to extract cash from the system.
It takes a very particular kind of person to become a trader or a broker; someone with the obligatory bouquet of insecurities, and with an urge if not to kill, then at least to be the very best (and hence, the richest).
Most of these traders are actually rather forward-thinking, well-read, cunning people. But somehow they still have this Neanderthal mentality when they get access to a big buck and think they can get away with taking some for themselves. As I was told so many times in a basement pub, “All that matters is how much money you’ve got”.
This principle is not necessarily specific to banking; however, it often appeals to representatives of the various departments in financial institutions. We are not directly managing any trading books or involved in market dealing, but we are still complicit in the actions of the firm we work for. We form the building blocks of this system and, by default, share its values even if we do not really think about it.
Banking has long exceeded its original primary functions – to take deposits and give loans. It is like an old pair of pants that has been ripped apart by greed and selfishness. No matter how hard politicians and regulators try to fix one problem, there will always be another one. And the reason is the values and motivation of the people involved. Ideally, we need a whole new pair of pants.
Naturally, with MiFID II obliging banks to report every deal within one hundredth of a second, it should be much harder for bankers to fiddle their own profits. It is, of course, a quantum leap from the days when back-office staff were time-stamping the tickets. But on reflection, it does seem a bit like a waste of two billion dollars (the estimated amount that financial firms have to spend in order to implement the required data-reporting systems).
It is just a matter of time before they find ways around the new regulations. Whatever they can no longer do in Europe they will accomplish in Dubai, Hong Kong, Singapore and New York City.