Back today after a few weeks away, fighting fit with batteries fully recharged. So was anyone as perplexed as I was by today‘s decision of the UK’s Financial Conduct Authority to impose a draconian fine of US$1m (£662,700 to be exact including a 30% discount for early payment!) on Mark Stevenson, a former prop trader at Credit Suisse Securities, and railroad him out of the industry for market abuse over his hyper-active buying in 2011 of £1.2bn of the 8-3/4% due 2017 UK Gilt?
Quoting section 118(5) of the Financial Services and Markets Act 2000, the FCA said Stevenson’s conduct was “particularly egregious” and fell far below the standards of integrity expected of FCA approved persons. Really? It seems an incredibly harsh outcome.
That section of the Act covers behaviour that consists of “effecting transactions or orders to trade (otherwise than for legitimate reasons and in conformity with accepted market practices on the relevant market) which (a) give, or are likely to give, a false or misleading impression as to the supply of, or demand for, or as to the price of, one or more qualifying investments, or (b) secure the price of one or more such investments at an abnormal or artificial level.”
But does what Stevenson actually did really fall under the definition of market abuse as quoted? He bought bucket-loads of one line of stock purportedly because it was trading cheap but in essence he was positioning in order to offer his bonds into a competitive reverse Bank of England asset-purchase auction as part of its QE programme. The regulator says Stevenson’s actions artificially increased the mid-market price of the bond, making his offer to sell at a marginally lower price look superficially attractive. Am I missing something here? So what?
The FCA reckons he wanted to sell his bonds to the Bank at an artificially high price. I don’t get this notion of artificial. The price was real. It may have been out of whack with its historical trading patterns but let’s be clear: the bond was illiquid, Stevenson was a volume buyer, the price went up, so oddly enough the yield spread to similar bonds was disrupted as a result and it outperformed. What’s artificial about that? Isn’t it just trading, which let’s be clear is the art of buying low and selling high? And if there’s a sniff of a buyer on the other side, doesn’t that make it a more obvious trade?
If Stevenson reckoned the Bank would be a buyer of that bond, what on earth is wrong with him trading on that? It was hardly inside information, given the Bank telegraphed its asset-purchase intentions ahead of time. Wasn’t Stevenson doing nothing more than engaging in a standard, if outsized, trading strategy that was frankly risky if it went wrong? Indeed, because the Bank received calls about the unusual trading pattern it opted not to buy a single bond from that line so the price fell back, presumably losing Stevenson a ton of cash on that portion of his trade.
QE, markets and the real economy
Tracey McDermott, the FCA’s director of enforcement, said Stevenson’s abuse “took advantage of a policy designed to boost the economy with no regard for the potential consequences for other market participants and, ultimately, for UK tax payers”. Err. Hold on: so the regulator doesn’t like the fact that a market participant used QE to his own ends? Really?
The only people to have benefited from QE have been professional market participants piling into carry trades of all sorts and not giving a damn about the economy. And harsh as this may sound, bond traders don’t get paid to facilitate the transmission of cash into the real economy or assist UK tax payers.
The FCA went to great lengths in its lengthy final notice to lay out Stevenson’s trading activity blow by blow. So here are my questions: is the fact that he acquired £331.1m of the bond on October 11 2011 the issue? If so, how much could he have bought without falling under the market abuse act? £200m? £150m? Is the fact that he accounted for 92% of trading turnover the issue? Would his behaviour be considered less egregious if he accounted for, say, 58% of turnover? Of if his total holding as a proportion of issue size had been 20% smaller? As far as I can ascertain – although I stand to be corrected on this point – market abuse regulations don’t impose comparative quantum limits.
The FCA noted that Stevenson should have been fully aware that his trading would increase the price of the issue. This just keeps getting worse. So heavy buying of an illiquid bond causes the price to go up? You learn something new every day. Condemning Stevenson for buying “with the express intention of increasing the Gilt’s price” seems to completely miss the point not just of trading but of the laws of supply and demand and the basic laws of economics. Why else would he buy?
One of the calls the Bank received about the price of the bond was from a trader who noted the activity appeared to be a deliberate attempt at “pushing the price higher in order to sell… later in the day”.
Has the world gone crazy?