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Opinion
Matt Levine

RBS Promises Not to Trade Against Clients Too Much

A thing that happens a lot is that a client comes to a bank and is like "I would like to sell you some X," and the bank says OK, and then the bank goes and sells some X to other people before or after or at the same time as it buys the X from the first client.

A thing that happens a lot is that a client comes to a bank and is like "I would like to sell you some X," and the bank says OK, and then the bank goes and sells some X to other people before or after or at the same time as it buys the X from the first client. That schematic generates a surprisingly rich set of possible scandals and non-scandals, and it can sometimes be difficult to understand which is which. Sometimes the bank's selling is called "market making" or "hedging," and that's more or less fine. Sometimes it's "front-running" or "manipulation," and that's more or less not.* Other variants are possible.**

Here's a Bloomberg News story about WM/Reuters foreign exchange benchmark maybe-manipulation, which is a lovely example of this fact pattern and a genuine puzzle. Here's the story. Clients want to trade currencies with banks at the WM/Reuters fix, a benchmark price set at fixed times each day. So they come to the banks before the fixing and tell them how much they want to trade. This makes sense: A bank's not going to let you trade at the 4 p.m. price at 4:30,*** and if you call them at like 3:59 and 58 seconds they'll probably be busy, but if you come to them at 3:30 then they'll agree to lock you in at the 4 p.m. price, whatever it is.