The bad behavior of greedy banks and the traders who work for them has been a hot topic in the financial news for the past several years—really, ever since the fallout from the financial crisis in 2008 revealed the high level of risk these banks were taking on.
Many in the public were outraged that nobody was taken to jail nor held accountable for the worst practices that amplified the financial crisis; instead, the big banks simply paid large fines to various government agencies and regulatory authorities.
In response to this outrage, it appears that regulatory agencies in both the United States and Great Britain have made a concerted effort to blame somebody for these misdeeds. These agencies seem to have found their “fall men” in a pair of Britons who, although guilty of violating the law, were nonetheless representative of their industry.
Tom Hayes, the Libor Scandal Scapegoat
The Libor scandal that officially broke in 2012 was one of the most shocking revelations of the financial crisis, not just because it involved blatant market manipulation (as opposed to reckless or sloppy trading in derivatives) but also because hundreds of trillions of dollars worth of assets are directly affected by Libor (the acronym for the London Interbank Offered Rate, the interest rate that banks charge to lend to each other). While Libor manipulation was the name of the game for many traders, Mr. Hayes was one of the most active (and aggressive) traders in bribing other contacts to influence their bank’s Libor number higher or lower, as it suited his trading positions.
Although the Libor rate hardly moves at all on a day-to-day basis due to the large number of participants who influence where it is set, minute changes of just one basis point (1/100th of a percent) could mean six-figure swings in either direction for someone making huge bets like Hayes was at the Tokyo office of UBS. In that case, Hayes was only influencing the “Tibor” (Tokyo Interbank Offered Rate), a rate still set in London that specifically influences the yen-denominated market.
What’s damning about the Hayes situation—which has come to light through the trial that ultimately sentenced him to 14 years in prison—is that 1) many of his colleagues were very willing to cooperate with him, and saw nothing wrong with it; 2) he was hardly the only trader engaging in such strategies; and 3) his superiors were often aware of, complicit in, or even encouraging of his practices. (Why wouldn’t they be? Most years, Hayes was earning his employers tens of millions of dollars.)
Navinder Singh Sarao, the HFT Spoofing Scapegoat
In a different type of manipulation case altogether, Mr. Sarao was accused of “spoofing” markets through the use of high-frequency trading algorithms. High-frequency trading (HFT, for short) is a relatively new development for banks and traders, but the markets have quickly gotten the gist of the method: financial institutions and trading firms looking for an edge have begun using these computerized trading platforms in order to execute orders and swaps at literally the speed of light. This not only eliminates the time needed to physically make trades, but it also lends itself to gaming other traders.
The strategy is known as “spoofing,” and is both unethical and deemed illegal by regulators. How is this done? Well, Sarao (and others like him) would use their computer algorithms to place conspicuously large orders as a way of revealing other market participants’ positions (as deduced from the subsequent action, such as a wave of short-covering), especially those using automated trading programs themselves. The original spoofer could then cancel the order and position themselves accordingly, or simply pile onto the favorable side of the trade now that much of the market’s positions are revealed.
Sarao was blamed for the 2010 “flash crash” that befell the NYSE on May 6th, causing about $1 trillion in value to vanish from the stock markets in perhaps 20 minutes. Sarao reportedly netted $900,000 from the tactic that day.
The case for Sarao’s martyrdom is much the same as Hayes: he was far from the only trader engaging in spoofing, and was certainly not discouraged by the firms he worked for. He was simply the best at it, as Hayes seemed to be with manipulating Libor through his network of contacts.
Nobody would argue that either of these men are “innocent,” but the fact remains that two singled-out individuals are taking the rap for an entire industry of market manipulators. We will see if the public is satisfied with Sarao and Hayes’s respective punishments are justice being served for the world-rocking ramifications of the financial crisis.