23rd November 2015

The computer says….NO.

On the 18^th November the Barclays’ reputation took another battering when New York Department of Financial Services regulator (NYDFS) levied an extra $150m fine on them because of the way they treated their foreign exchange customers. That took the overall Barclays Foreign Exchange NYDFS fine total to $635m. A level of fine the HM Treasury must salivate over. 

By the NYDFS releasing e-mail trails a damningly terrible state of affairs is laid bare doing absolutely nothing to restore public trust in financial services on both sides of the pond.

Barclays operated a very cunning ‘casino banking’ defence system called ‘Last Look’.

It works like this, said the NYDFS.

Barclays operates an electronic trading platform for the foreign exchange market, called BARX, which allows traders to execute FX trades with Barclays. 

Barclays’s FX electronic trading clients fall into two broad categories:  (1) clients that trade using a Barclays graphical user interface (“GUI”); and (2) clients that trade using a Barclays financial information exchange application program interface (“FIX/API”). 

The ever-increasing power of sophisticated automated electronic trading systems and technologies creates opportunities for investment entities, which might be able to exploit latencies in the flow of information by requesting trades at prices informed by information that Barclays and other market makers might not yet have. 

Orders of this kind, which seek to outflank and exploit a market maker’s less nimble trading systems, are known as “toxic order flow” or “toxic flow.”  For example, a sophisticated electronic trading business might detect market movement some milliseconds (1/1,000sth of a second) before Barclays’s systems have, and therefore benefit by trading with Barclays before Barclays’s systems have properly adjusted their prices.

In order to protect Barclays from toxic flow, Barclays designed Last Look, which imposed a hold period between its receipt of a customer order and its acceptance and execution of the same.  

During this interval, Barclays would compare the BARX price of the customer’s order at the start of the hold time against the BARX price at the end of the hold time; where the price at the end of the hold time had moved against Barclays (and in favour of the client) beyond the threshold set by Barclays in the tens and hundreds of milliseconds following the order, Barclays would reject the trade.

The NYDFS’s acting superintendent of financial services, Anthony Albanese, said: “This case highlights the need for greater oversight and action to help prevent the misuse of automated, electronic trading platforms on Wall Street, which is a wider industry issue that requires serious additional scrutiny.”

In May this year the FCA fined Barclays £284,432,000 for failing to control business practices in its foreign exchange (FX) business in London.

That was the largest financial penalty ever imposed by the FCA, or its FCA predecessor. 

Somebody actually designed ‘Last Look to perform as it did. 

The NYDF report said on June 6, 2011, in an email discussion about Last Look, a Barclays Managing Director and Head of Automated Electronic FX Trading wrote:  “avoid mentioning the existence of the whole Last Look functionality.  If you get enquiries just obfuscate and stonewall.” 

Very TCF. His punishment was to be suspended by Barclays yet the NYDFS has stated that the bank should “take all steps necessary to terminate this individual”.

And as for the ‘geek’ who designed the software, I wonder where he has gone, VW? 

Once again a ‘too big to shut down bank’ gets away with just a fine, plus a bit of naming and shaming but free to work toward designing yet another cunning way to see consumer detriment win the day. 

I have been a Barclays Bank customer, business and personal, for almost 50 years. Given their latest little foray into ensuring that customers are treated unfairly I am not sure if it is time for a change. 

Can anyone recommend a bank to me? 

I may have a wait on my hands.

Regulation, Panacea Comment