Messages between traders in a commodities chat room last week ranged from the dating habits of Kim Kardashian’s mother to West African pirates plundering oil and gas reserves to a riddle.
“What did the pirate say when he found out he was long WTI-Brent?” one user, identified only by number, asked in an Instant Bloomberg chat room Nov. 18, referring to the price gap between U.S. and international oil prices. “ARRRRGHBITRAGE THIS” came the punchline.
Chat-room messages, like these provided to Bloomberg News by a participant, have taken the role of exchanges or trading pits in markets that lack them. They are a place to discuss offers and prices for currencies and energy swaps, as well as to gossip about reality TV stars or tell bad jokes. They also leave a trail of dealers’ online behavior.
The investment-banking arm of UBS AG (UBSN), Switzerland’s largest bank, told employees yesterday it was banning the use of multibank and social chat rooms as regulators around the world probe manipulation in the $5.3 trillion-a-day foreign-exchange market. JPMorgan Chase & Co. (JPM:US) and Royal Bank of Scotland Group Plc (RBS) are considering similar actions. Transcripts of chat-room discussions helped regulators identify traders’ wrongdoing in the rigging of global benchmark interest rates, or Libor.
“I find the idea that they’re going to ban chat rooms a ludicrous solution to a larger problem,” said Robert Savage, chief executive officer of New York-based online foreign-exchange research firm Track.com who’s worked for Lehman Brothers Holdings Inc., Bank of America Corp. and Goldman Sachs (GS:US) Group Inc. “If you as a customer leave an order with a bank, there has to be some sense that that’s private information and you can’t be sharing that information on the Street, with competitors, to set a price.”
Bloomberg News reported in June that dealers said they had been front-running client orders and attempting to rig the benchmark WM/Reuters rates by colluding with counterparts and pushing through trades before and during the 60-second windows when the benchmarks are set.
At least 12 traders have been suspended over the currency-trading probe and about 11 banks, including Goldman Sachs and Barclays Plc, have said they’ve been contacted by authorities. Frankfurt-based Deutsche Bank AG said last month it’s cooperating with regulators, while UBS said Oct. 29 it’s taking measures against employees without quantifying the number of workers involved or saying what actions it took. Edinburgh-based RBS has turned over records of chat-room conversations to authorities. No one has been charged with wrongdoing.
At stake is the informal system that, without any plan or design, evolved to define the way traders do business, especially in less transparent markets.
Chat rooms began so traders and salespeople on different floors or in different offices of a bank could coordinate with clients. The chats create a central reference point that’s easier to follow than e-mails or phone calls, according to Zachary Chavis, a credit trader at Sage Advisory Services Ltd. in Austin, Texas, who formerly worked at French banks.
Traders may chat on platforms provided by Bloomberg LP, the parent of Bloomberg News, or Thomson Reuters Corp. and private networks. In markets for physical commodities such as oil, Yahoo! Inc.’s messenger service is so ubiquitous that some traders and brokers put their screen names on their business cards.
The messages are often riddled with jargon and abbreviations that may look like a jumble of letters and numbers to those unfamiliar with the lingo. Names flash red to announce a new message. A constant stream of numbers and letters may appear, indicating the names of companies making offers, active and passive bond underwriters and price quotes that can be seen by all active participants. Interested buyers can send an instant message, or IM, to a trader to make a deal.
When a customer of Paramount Options Inc. President Ray Carbone’s said Nov. 14 he wanted to buy a crude oil call spread, the simultaneous purchase of one options contract and sale of another, for $75, Carbone sent out instant messages bidding for 74. He got replies saying people would sell at 77 or 76. Then somebody said “I’m at 75.”
“I can say right back on the IM, ‘Buy 200,’ and he’ll say, ‘Sold 200,’ and you have a trade,” Carbone, whose firm is a floor broker at the New York Mercantile Exchange, said by phone.
As shares of Groupon (GRPN:US) Inc. reversed a 2.2 percent decline to gain as much as 1.3 percent by about 12:30 p.m. on Nov. 18, one trader wondered why.
“You hear anything in GRPN?” he asked, using the company’s stock ticker, in a chat room run by Westport, Connecticut-based Hammerstone Group, which provides for a fee moderated chat rooms in which participants use their real names. “Was t/o chowdah earlier from amzn via Ransquawk,” came the reply, meaning the price was moving in reaction to comments from Amazon.com Inc. (AMZN:US), citing a financial information service.
The messages were provided by participants. Bloomberg reporters are prohibited from participating in client chat rooms on the company’s terminals.
As instant messaging caught on over the past decade, the clatter of computer keys has replaced shouting on trading floors worldwide. Some people have an entire screen devoted to instant messaging, with as many as 100 chats open at once, according to a currency dealer in New York who requested anonymity because his employer prohibits speaking to the media.
“Instead of yelling it out in the pit, you blast it on an IM,” Carbone said. “You blast out ‘good morning’ to 25 people, you get 25 ‘good mornings’ back.”
While enabling groups to share information quickly, chat rooms are open to abuse just like any other form of communication, said Kit Juckes, a global strategist at Societe Generale SA in London. Bankers will have to find new ways to serve clients if regulatory or internal reviews restrict the use of instant messages, he said.
“As a concept, the idea that instead of phoning everybody all the time you might just have a chat open with your clients to tell them useful things seems eminently logical,” Juckes said. “If you give them dumb names and you use them as a place to discuss what your orders are and rig a market, we could obviously see what that might do to the future of chat rooms. If abuse of the technology means that we can’t do it anymore, we’ll have to find a different way of adding that value.”
Trading conducted in chat rooms or by phone is known in the industry as over the counter, as opposed to trading on exchanges. Since transactions are done directly between two parties -- sometimes with the help of a broker -- prices generally are private.
While chat rooms help information get around more widely and quickly and leave a verifiable written record, traders and brokers can still be selective about sharing information, Carbone said. That contrasts with trading pits, where everyone has the opportunity to hear all trades, and on exchanges that feature public bids and offers.
Chat rooms exist across companies, often based around common interests such as sports teams, according to a London-based banker who asked not to be identified because he isn’t authorized to speak publicly. On slow Friday afternoons, traders might play trivia, with questions like which player scored in a certain Football Association Cup final.
Some of the rooms, with names like “The Bandit’s Club” and “The Cartel,” may not have been so innocuous, according to a complaint filed Nov. 8 in U.S. District Court in New York by Simmtech Co., a South Korean computer-parts manufacturer, alleging that traders from different banks collaborated to manipulate benchmarks in the currency market, the world’s largest.
“It’s collusion that seems to be the issue,” Michael DuCharme, head of foreign exchange and business growth and development at Seattle-based Russell Investments, which oversees about $246 billion, said in a Nov. 18 interview, before the UBS announcement. “If the chat rooms contribute to the collusion, then I think that can be worked around. I don’t know if banning that avenue would be sufficient.”
Banks sometimes communicate with one another to match orders to buy and sell, which avoids paying fees to a broker, the currency trader said.
The European Union is also probing the foreign-exchange market. Joaquin Almunia, the EU’s antitrust chief, compared the concerns to those examined in the investigation of the London interbank offered rate, known as Libor, which led to fines totaling about $2.6 billion against four companies.
The Libor probe found that traders at the world’s largest banks sent thousands of instant messages to colleagues, brokers and counterparts at other banks discussing how to move interest rates to boost profits.
In one exchange, a trader at an unnamed bank thanked a Barclays trader for agreeing to try to lower his bank’s Libor submission: “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger,” according to Barclays’s June 2012 settlement with the U.K. Financial Services Authority.
A UBS trader in another exchange told his broker: “If you keep 6s (the six-month Japanese Libor rate) unchanged today... I will f*cking do one humongous deal with you ... Like a 50,000 buck deal, whatever,” according to the Zurich-based bank’s December 2012 settlement with the regulator. “I need you to keep it as low as possible ... if you do that ... I’ll pay you, you know, 50,000 dollars, 100,000 dollars ... whatever you want ... I’m a man of my word.”
Banks and regulators have been reviewing records of instant messages, e-mails, phone calls and trading data in the foreign-exchange market. Three of the most senior currency traders in the industry have been put on leave, according to people with knowledge of the investigations.
In a Nov. 27 memo to employees, the executive committee of UBS’s investment bank said all social-related chat rooms are prohibited and must be closed immediately. Multibank and dealer chat rooms are also banned, and any request for an exception, which can be made “for business critical use only,” will have to be approved by the executive committee member and compliance officer responsible for the specific business, it said. A UBS spokesman confirmed the memo’s contents.
UBS said use of chat rooms with a single client will need specific written approval from a managing director. Such chats, which could have several UBS users communicating with a single client, will have a managing director assigned to them, who would be permanently on the chat, act as a moderator and be responsible for content and behavior in the room, the memo said.
All internal one-to-one and multiparty chats should be conducted through UBS internal communication tools only, the bank said.
JPMorgan, the biggest U.S. bank by assets, is deciding whether to ban traders from using electronic chat rooms to communicate with peers at other companies, according to a person with knowledge of the matter.
RBS, Britain’s biggest publicly owned lender, and Zurich-based Credit Suisse Group AG (CSGN), Switzerland’s second-largest bank, also are reviewing chat-room use, two other people said.
Jack Grone, a spokesman for Credit Suisse, and Brian Marchiony, a spokesman for New York-based JPMorgan, declined to comment. Rebecca Nelson, a spokeswoman for RBS, couldn’t be reached for comment.
In foreign-exchange markets, where trading and pricing doesn’t occur on exchanges like stocks, bonds and energy futures, chat rooms are an important way for traders to find out what’s going on, said Joe Rundle, the head of trading at ETX Capital in London. The discussions may have gotten out of control as boasting and goading led to statements that may have not been true yet caused traders to react, he said.
“You’ve got these really sort of backwards markets that haven’t evolved and have actually been left behind,” Rundle said. “The line kept getting slightly further and further, and then if you look back at it and go, ‘My God, that was awful.’”
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