THE DECISION BY the UK’s Financial Conduct Authority to impose a draconian fine of US$1m (£662,700) on Mark Stevenson, a former prop trader at Credit Suisse Securities, and railroad him out of the industry for market abuse drew squeals of shock and bewilderment from market participants. They claim the regulator is making a scapegoat of someone for no apparent reason, save perhaps for having the audacity – the perfectly legal audacity – to try to front-run the Bank of England’s QE auction. No matter how you look at this, the decision is odd.
The grossly disproportionate punishment meted out to Stevenson stemmed from his hyper-active buying in 2011 of £1.2bn of the 8-3/4% due 2017 UK Gilt. The off-the-run line, first issued in 1992, has £10.879bn outstanding, according to the DMO. I spoke to a host of traders, hedge fund managers and inter-dealer brokers about this, yet not one of them had the remotest idea of what Stevenson had done wrong based on the FCA’s final notice. The wonky decision left the market in a state of puzzlement.
Is the fact that Stevenson acquired £331m of the bond on October 11 2011 the FCA’s beef? If so, how much could he have bought without falling under market abuse language? £200m? £150m? Was the fact that the BoE might have been on the other side of the trade the issue? Apparently not, according to the FCA notice. Is the fact that Stevenson accounted for 92% of trading turnover on one day the issue? Would his behaviour be considered less egregious and abusive if he accounted for, say, 58% of turnover? Was it the fact that had the BoE accepted his offer, he would have accounted for 70% of the total auction value?
I did put in several calls to the FCA but didn’t manage to reach anyone, so it’s hard to know its answers to those questions – if it has any. Besides, market abuse regulations don’t impose comparative quantum caps.
“The FCA’s ruling seems like a very arbitrary red card aimed at an individual. Seems to me Stevenson has been held up as a classic sacrificial lamb,” said one market participant.
QUOTING SECTION 118(5) of the Financial Services and Markets Act 2000, the FCA notice said Stevenson’s conduct was “particularly egregious” and fell far below the standards of integrity expected of FCA approved persons. But no-one I talked to has a clue what they’re talking about.
That portion 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”.
Did Stevenson breach these rules by buying bucket-loads of one Gilt issue with the intention of offering an £850m slug into the Bank’s competitive reverse auction? 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? What’s wrong with that?
THE FCA SAYS Stevenson wanted to sell his bonds to the Bank at an artificially high price. This notion of artificial gets into the detail of the FCA’s thinking although no-one I spoke to really understands what they’re getting at. The market price may have been out of whack with historical levels but that’s because the bond was illiquid and Stevenson was a volume buyer; the price went up and the yield differential to similar bonds was disrupted as it outperformed.
Wasn’t Stevenson simply engaging in a standard, if outsized, trading strategy that was frankly risky if it went wrong?
If Stevenson reckoned the Bank would be a buyer of that bond, what on earth is wrong with him trading on that? If he had inside information that the Bank was going to target that particular Gilt and loaded up, he would have been banged to rights. But that is categorically not what the FCA said happened.
If Stevenson had lifted all the bonds from the market and subsequently refused to repo them out (thereby putting a squeeze on the issue and leading to the risk of failed trades and buy-ins from the clearing house back to himself at a price he alone could command) that would be tantamount to market manipulation. But again, that’s not what happened.
Wasn’t Stevenson simply engaging in a standard, if outsized, trading strategy that was frankly risky if it went wrong? Indeed, because the Bank received calls about the bond’s unusual trading patterns, it declined to target that issue, forcing the price to fall back, presumably losing Stevenson a ton of cash on that leg of his trade.
THE NOTICE QUOTES Tracey McDermott, the FCA’s director of enforcement, saying that 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 taxpayers”. Err. Hold on: so the regulator doesn’t like the fact that a market participant used QE to his own ends? How ridiculous. Whether it likes it or not, the people who have most 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 taxpayers.
The FCA noted that Stevenson should have been fully aware that his trading would increase the price of the issue. Here’s where it gets comical: 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?