Levine on Wall Street: Rigging FX and Defining Insider Trading

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Who gets to define insider trading?

There's no law against insider trading. The law says that you can't use "any manipulative or deceptive device" in trading stock, and courts have long interpreted that to include insider trading. But there are a lot of gray areas in defining exactly what insider trading means, and the Securities and Exchange Commission is in many ways in charge of the details. So for instance it's illegal to trade "on the basis of" illegal inside information, but what does that mean? Well, there is an SEC rule saying that if you trade while having inside information, we can just assume that you traded on the basis of that information. Or, it's illegal to trade if you've misappropriated information that you had a duty to keep secret. If you're a lawyer for a company that's planning a merger, you pretty clearly have a duty to keep that secret. But what if you're that lawyer's roommate? His golf buddy? The SEC, as we've discussed, takes rather a broad view of who has "duties of trust or confidence," and there's another SEC rule providing that anyone with a history of "sharing confidences" might have such a duty.

It's possible that the SEC is wrong. I mean, those are presumably valid regulations, and if you are subject to those regulations and breach them, you could get in trouble with the SEC. But the SEC can't put you in jail -- it has only civil powers -- so it seems odd that prosecutors could put you in jail based on the SEC's rules. Yesterday Doug Whitman lost an effort to appeal his insider trading conviction to the Supreme Court. But in denying his petition, Justice Scalia issued a statement saying that courts should not be too deferential to those SEC rules in criminal cases: The SEC gets to define administrative regulations, but not criminal conduct. If you've been arrested for misappropriating information from a roommate or golf buddy, this might be good news for you.

Are you excited for the foreign-exchange-rigging settlements?

The latest news is that the Commodity Futures Trading Commission will announce its own settlement with the same half-dozen banks that the U.K. Financial Conduct Authority and the U.S. Office of the Comptroller of the Currency are settling with. All this week, apparently Wednesday. So by my math there will be 18 separate collations of dumb chat-room conversations about currency manipulation, all at once. Is that exciting? Kind of, right? We actually know what Libor manipulation was, but I'm still a bit in the dark about the FX stuff. Some of what has been reported on as evil manipulation and front-running strikes me as not that, but just legitimate hedging of client orders.  But there are obviously some actual problems -- thus the 18 nine-digit settlements -- so it'll be fun to see what they are.

Some market structure.

One way to think about dark pools is that they're basically a way for brokers to execute customer orders without paying stock exchange fees. Your customer wants to sell, a high-frequency trader wants to buy, everyone is more or less indifferent to where they do that, but if they do it on an exchange you have to pay $0.30 per 100 shares or whatever, while if they do it in your dark pool you pay nothing. So you route to your dark pool. Various evils might or might not come from this. One is that lots of trading happens away from the displayed prices of public stock exchanges, and there is a (plausible) view that trading at displayed prices improves market efficiency and should be encouraged. So part of the SEC's tick-size pilot program involves a "trade at" rule that basically discourages trading on dark pools and encourages trading on public exchanges. Brokers who run dark pools are unhappy about this:

“The exchanges who have a hand in this and seek to benefit from the onerous version of a trade-at basically put the screws to us,” Michael Masone, legal counsel for equities at Citigroup, said at an event sponsored by the Securities Industry and Financial Markets Association.

That seems ... true? All market structure debates are filtered through a haze of self-interest; Citi's main complaint is presumably that it loses opportunities to save money by routing to its own dark pool, but of course the public exchanges are pushing to have orders sent to them because that's how they make money. Elsewhere, BATS's application to list non-transparent exchange-traded funds was turned down.

Steve Cohen bought a Giacometti.

Churchill supposedly said "I could not live without Champagne -- in victory I deserve it, in defeat I need it," and Steve Cohen seems to apply the same thinking to art works with nine-digit price tags. When times were rough last year, just after paying $616 million to settle some insider trading lawsuits and while still working out the settlement that ultimately shut down his hedge fund, Cohen kept his spirits up by buying a $155 million Picasso. Now, with his family office outperforming most hedge funds, even (one assumes) without insider trading, Cohen celebrated by buying a $101 million Giacometti "Chariot." A dealer says of Cohen that he "has just the right instincts, ones that can’t be learned from reading art history books," though it is hard to imagine how buying this particular piece would demonstrate that. Here is Felix Salmon on that Giacometti:

It's branded. And if you know anything about the high-end auction market, then when you see "Chariot" you'll know that it's "Chariot," the hundred-million-dollar sculpture.

That's probably why Sotheby's was willing to say in public that "Chariot" was going to set a new record: to the kind of person with the means and desire, owning The Most Expensive Sculpture in the World only provides that much extra cachet and status. If you're already spending a hundred million on the thing, why not toss in a little more and get a record-breaking sculpture instead? The extra cost should be a virtue, and it's not like you need the cash for something else.

You really can't learn those instincts from reading art history books, though making billions of dollars in the stock market might help develop them.

A principal-agent problem.

If a company hires a compensation consultant to tell it how much to pay its chief executive officer, what will happen? Obviously the CEO's pay will go up. There is some science on that, but there is also a basic principle, which is that companies don't hire consultants. Humans at those companies hire consultants. Everything that every company does is done by humans. The consultants are no dummies, and understand that they serve at the will of the humans in charge of the companies (the board or sometimes, ridiculously, the CEO himself), not the anonymous shareholders whose money they are spending. Anyway. This seems wrong:

That is rarely how boards think about it. For them, the best chief executive makes the most money.

“How do you tell your shareholders you have a great C.E.O.?” Mr. Rau said. “’For proof, we pay him peanuts.’ They never say they do that.”

Nah, actually, a big CEO salary isn't cool. You know what's cool? A $1-a-year CEO salary.

Things happen.

Goldman Sachs's employee-only private equity funds seem lucrative. China is opening the Shanghai Stock Exchange to some foreign investment, and Hong Kong banks are fighting for market share. DogVacay raised a $25 million funding round. Big-data company Hortonworks filed for an initial public offering. GoPro is planning an $800 million follow-on offering for right around the time its IPO lockup expires, most of it secondary (from selling shareholders including the chief executive); GoPro and its bankers have been a bit ham-handed about their lockup so far so expect some complaining. Josef Ackermann might become chairman of Bank of Cyprus. Harold Hamm has to pay his wife $973 million in their divorce (previously). Saudi Arabia is probably not engaging in predatory pricing. AOL employs a digital prophet to "listen to where media is headed and figure out how our brands can win in that environment." Florida Gambling Ship Files For Bankruptcy.

  1. Possibly originally Napoleon.

  2. Probably not this joke, any more.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net