Never say never

Are we seeing phantom bogeymen lurking in every corner of the financial markets these days or have there been so many examples of bad practice and manipulation in recent years that it’s safer to investigate and suspect everyone?

Earlier this month, it was widely reported in the London-based financial press that members of the UK parliament sitting on the Treasury Select Committee had criticised the Financial Services Authority for not investigating rigging of the closing auction on the London Stock Exchange. 

The smoking gun? Former city executive Mark Garnier said manipulation of stock prices in London and elsewhere was an open secret among equity traders. In an opening meeting on fixing (or fiddling) of benchmark prices attended by David Bailey, the head of markets infrastructure and policy at the Financial Conduct Authority, Garnier said he was amazed the FCA had not explored potential abuses in the stock market more thoroughly. After being told that the topic was “very, very” widely discussed and was a “big, big deal”, Bailey said he’d report back on the nature of any relevant FCA activity.

I am not sure if Garnier ever traded equities in London. His website is a little vague on his city career, while says he traded the gilts markets in London before trading equities in the far east for various investment banks, before setting up his own investment management firm in 1999.

While a speech made to the Centre for Policy Studies in 2012 doesn’t mention this “big, big deal”, it’s clear Garnier knows the risks, rewards and conflicts of interest that must be balanced by financial market participants extremely well. Having started out as a blue button on the pre-Big Bang floor of the London Stock Exchange in 1982, he has made it his business to keep up with regulatory developments ever since. To bring himself up to date with trading practice, Garnier called some equity trading contacts before he chastised Bailey to ensure he’d got his facts straight.

I really don’t know whether he has or not.

Equities trading is very much The TRADE’s home territory so it was fairly easy to contact some pretty informed sources for their view of potential fixing in the market close. All sources said that they were unaware of anyone on the buy- or the sell-side raising such concerns. On the contrary, the number of participants, the level of transparency and the volume of trading in the opening and the closing auction make these particularly difficult to game, at least compared to less liquid markets with fewer participants, such as certain commodities markets that are dominated by a handful of major players.

In seven years writing about equities trading more than any other subject, the only time I’ve had cause to look into closing mechanisms in any depth was following the Hong Kong Stock Exchange’s decision to suspend its auction after a 12.5% slump in HSBC’s share price in March 2009. I just don’t recall anyone saying auctions were routinely rigged or easy to manipulate. But never say never. I have written about dark pools extensively in recent years and interviewed many users and providers of crossing networks, but was still rather surprised by the claims of malpractice made by New York Attorney General Eric Schneiderman. Naïve? Perhaps. Disappointed? Certainly.

One source said there is merit to FCA investigating closing auctions as a thorough probe would help to demonstrate the market is working as it should and help improve confidence. Even now, with all the evidence of wrong-doing and misaligned incentives around us, I wonder whether we’re moving too close toward a guilty-until-proven innocent mentality.