Friday, August 09, 2013

Criminal, Victim or Just Stupid??

So Bruno Iksil will (apparently) not face charges. Hmmmm. I've had nothing to say on The Whale, mostly because the debacle (and its intricacies) have been covered rather well (particularly  by Matt Levine) leaving little to add on the subject. But no charges? Really?

Why does this shock me? Because it appears obvious that with the size of the position and the persistence of accumulation and targeted activity in the market, that the objective of Mr Iksil was to paint a false and misleading picture of the market by intentionally manipulating the market price (hence marks) of his position and by not letting prices trade askew, (if he could do anything about it). Anyone who has traded size in squeezable markets will immediately know what I am saying.

Snookered Hedge Funds are applying similar logic in their lawsuits against Porsche AG (though admittedly Porsche was operating in a market that was decidely more-limited in scale). But I wonder, had Mr Iksil been successful in engineering a squeeze, or waiting out for some market event that caused redemptions and deleveraging within oppositely-positioned funds, whether JPM would have been subject to similarly flavoured claims or lawsuits, irrespective of the theoretically unlimited market size in the offending instrument, constrained only by counterparty and credit limitations. 

As an equity girl, this is all the more egregious. We must file positions periodically in great detail, and whenever we move above a modest level. We are obliged to law to act methodically when dominate a market - either making a bid, or limiting our actions. The idea of owning 50% or 70% of a "market" and still being allowed to operate unassailed is mind-boggling to the ruler-followers or impossible tempting to the black-hats. As a price maker, one controls the price, and one can use every marginal trade to insure, if not a profit, then against a mark-down...until one cannot, as a result of being placed upon Uncle Jamie's knee and spanked.

So the idea that Bruno Iksil had anything other than criminal intent in painting and perpetuating a false and fictitious market is laughable, and preposterous. This leaves two possibilities. The first one is that he was ordered to do so and cut loose when it went horribly wrong. That JPM tried to cover up a large and ...ahem...rather embarassing loss is not in dispute. But it appears this resulted from concerns about how stupid they would look to have let it happen, rather than management collusion on trading objectives and strategy - so I'd attribute this a low-probability.  The second possibility is that Bruno Iksil is just the dumbest-of-fucking dumbasses ever to get a bankrolled seat at the table!! Rather than having criminal inten, he simply redefined the word STUPID in bold-faced upper-case. But Ecole Centrale is nothing like Nick Leeson's Middlesex Univ., and Mr Iksil didn't crawl out from under a back-office rock. This is an absurd thought. He is anything but stupid, and knew precisely what he was doing and trying to accomplish by continuing to increase the size of his position with the well-defined objective of protecting the mark-to-market valuation on his existing (large) book. Can this be called anything else?

I find it surprising that this behaviour is not the focus of attention. It is precisely this point which regulatory authorities should be focusing: the interference of market-determination of prices resulting from the creation  of a false and misleading market. All interested in liquid functioning democratic markets determining prices should take note.


RC Jennings said...

Yes and Yes and Yes but as someone who traded in markets and built products in the dark ages (80's) when we worried about leveraged traders taking positions in derivatives and driving marks near the close or at expiration I find this new world bizarre. Once the major exchanges became private for-profit platforms the writing was on the wall and the failure of the regulators (or maybe it was their success - who knows how much campaign money was raised) to force centralized clearing sealed the deal. The goose (once golden) will slowly be choked and some years hence parents will be asked by children about these things called "markets" and what were they all about.

RichL said...

Iskil's superiors knew about the positions, and also asked him to nudge his marks toward a less embarrassing number when he didn't want to. It isn't criminal to be wrong, and there weren't any tickets in the drawer.

Anonymous said...

"the interference of market-determination of prices resulting from the creation  of a false and misleading market. All interested in liquid functioning democratic markets determining prices should take note."

And the Fed along with other major central banks owning 25-35% of their own bond markets and purchasing more than monthly net or even gross supply is different how might I ask?