[GJM] TRICKS OF THE TRADERS from [www dot ecotort.gn.apc.org]

[Nick St Clare]

  TRICKS OF THE TRADERS

What's the rarest commodity on the stockmarket? Honesty. A former broker 
exposes the corruption, greed and insider dealing endemic in the 
City          The Guardian, Saturday May 3 2008

 

It was a typical day of coke hangovers and questionable ethics. Half 
past 10 in the morning and I was slumped at my desk, grey Hermès tie 
hanging despondently from my neck like a hangman's noose. I was 
struggling to breathe. Steve on the other side of the room overruled my 
pleas for the air conditioning to be switched on - another reason to 
hate him and his crew on the old-boy side of the desk.

        We sat in long, straight rows in the trading room, like slaves 
chained in the hold of a Roman galley. Our chains were gilded ones, 
granted, but they shackled us all the same: from 7 till 4.30, five days 
a week, we barely left our desks. There were eight screens shared 
between each pair of traders, the monitors stacked on top of one another 
in a tight semicircle. Hundreds of stocks flashed their rise and fall 
across the screens, with the Reuters newsbar spewing out company 
announcements like a Gatling gun all day. Our eyes were trained to 
follow every flicker. Banks of phone lines were available at the push of 
a button, two handsets per man - one for the right hand, one for the 
left - thoughtfully built of toughened plastic to withstand the 
phone-to-wall smashing that took place whenever a deal fell through. 
This was our world - and the flashing numbers scrolling past on the 
liquid crystal screens could make or break us, turning us from heroes to 
villains and back again in the blink of an eye. My boss Tony's rasping 
voice bored its way relentlessly into my ear from the minute I sat down 
to the minute I bolted at the closing bell. Today was no exception, try 
as I might to ignore him.

        "Everyone's saying there's a bid for Company A," he babbled. 
Yeah, Tone, but you're like the boy who cried wolf - every five minutes 
he'd get a text, or a call, or even just a vision, about this or that 
company being the subject of a takeover bid. Nine times out of 10 it was 
complete nonsense - but in this game nonsense wins prizes. Because if 
you buy early, and the story reaches enough people, the stock's going to 
fly - truth or no truth - and you've sold yours well before the company 
issues a denial announcement.

        Hard facts meant little in a world ruled by paranoia and fear - 
paranoia that everyone's trying to do you out of your profit, fear that 
you're going to miss out on even bigger winnings if you don't follow the 
herd. People like Tony acted as both instigator and reactor in this game 
- some days he set the ball rolling when he felt like ramping a stock; 
on others he'd be just one more adding to the circle of Chinese whispers 
that blew round the City like wind through rushes.

        So, for all I doubted this latest rumour, I agreed to keep my 
eye on the screens, in case anything did happen. We worked well like 
that - he had all the sources, I did the grunt work. He'd large it up at 
Fabric, Hakkasan or wherever the denizens of the trading scene hung out, 
while I, faithful lapdog, got to be his Sets boy by day. (Sets is the 
computerised trading floor used by the London Stock Exchange.) If you're 
quicker than the other 10,000 traders out there, you can read an 
announcement, make up your mind in a flash, and buy or sell before the 
others have even clocked something's going on.

        That's the way it would go. I'd seen it happen. Bang - Company B 
announces, it's received an approach. Your fingers know what they're 
doing before your eyes have caught up. Buy ... 100,000 ... limit, say, 
£7.65. Got them - now you're off and running.

        Ten seconds later and the little beauties are changing hands at 
835, no ... 840, 850 ... 860 now ... you're yelping like a puppy and, 
ignoring everyone around you, selling back the 100,000 you've just 
bought for maybe 862. The brokers erupt like Vesuvius. Right there 
they're sitting on nearly a hundred grand profit.

        Their hearts are racing. They get the lift down, then run out on 
to the street for a smoke.

        "Keep it down, keep it down, someone'll hear..." And this is the 
beauty of the operation. With the team leader on board level at the 
firm, yet still a dodgy little bastard at heart, a three-man team has 
the means to pull this type of heist all day, every day. The rules say 
you must specify which client you're dealing for before you trade - so, 
in theory, the Company B winnings would already have a home. But for 
many a broker, the rules are slightly different. You trade first, ask 
questions later. If it all goes pear-shaped, if the stock falls instead 
of rises, there's always a pension fund or discretionary account that 
can take the hit for 50 grand or so. But if, with Company B, say, you 
hit the jackpot, then screw the clients, this one's for the boys.

        Everyone had dummy punters, friends or relatives who let you 
wash any winners through their account. So in the case of Company B and 
a three-man team, this would mean just shy of 100 grand split three 
ways: more than £30,000 - less 40% capital gains tax - and that would be 
nearly 20 grand per man.

        I had a setup with my mate M that we'd go 40-60 on each deal - 
but I had to see it in cash the same day. And, of course, I took the 60. 
His account was entirely governed by me. I had tacit approval to move as 
much stock through it as I liked, so long as he was always up at the end 
of the week. And that's what I did. The compliance department (company 
employees who were answerable to the Financial Services Authority [FSA] 
which was supposed to check that all the deals were above board) barely 
batted an eyelid at his account's stellar performance, assuming he was a 
proper punter who knew the ropes - plus I tossed in a few losing trades 
every now and then to throw them off the scent. We needed to maintain 
only around 20 grand in the account to keep it operational. *I traded 
off margin (that is, we had only a small percentage of what we were 
spending in the account); so long as the trade was bought and sold 
during the same three-day period, no cash would ever need to be laid out 
on the deal.* In this way, I could take six-figure positions in his name 
with ease. Whatever smash and grab I'd pulled off would soon be marked 
down on a dealing ticket with M's name and number at the top; I passed 
it to the boys in the back office who put the trade into the system, 
thus ensuring the cash made its way to its (not so) rightful home. That 
meant, in a few hours' time, I could be picking up several grand in 
folding bills somewhere near Bond Street.

        Behind the headline-grabbing stories of rogue traders losing 
billions, the more mundane, day-to-day world of high finance is as wild 
and unregulated today as it ever has been. Brown envelopes stuffed with 
£50 notes change hands every lunchtime in bars across the City; drugs 
wreak havoc with traders' judgments as they stake fortunes of their 
firms' money on the markets; and greed trumps all else in the stampede 
to get rich or die trying.

        "When in Rome, build a fucking aqueduct." Those words, bellowed 
at me by my biggest client as he lay sprawled in the bar, proved to be 
the most telling advice I ever got in the City. Everybody's doing it, 
why shouldn't we? There's no point pretending - no one is in this game 
to make the world a better place. It's all about the money. From the 
bottom up, the only thing that matters is feathering your own nest, 
regardless of who gets shafted along the way or how compromised your 
morals become in the process.

        I played the game for the best part of a decade and saw 
first-hand what lies beneath the veneer of London's financial district. 
*For all the stock exchange is presented as a transparent, trustworthy 
great British institution, the truth is that everywhere corruption drips 
like honey. For all the talk of FSA controls, those working there know 
they can get away with abuses with barely a slap on the wrist - and so 
they do, day after day, year after year. *

        The way things worked in our firm, the well-dressed, 
well-connected north London boys were groomed to become the next 
generation of brokers, skilled at flattering the clients. At the same 
time, the Essex boys who joined the profession ended up as dealers, 
equally obsequious, penetrating the inner circle of the market to get 
the best prices buying or selling shares. The relationship between 
brokers and dealers was a symbiotic one, though below the surface there 
was little love lost between the two sides. The brokers looked down on 
the uncouth mannerisms of the barrow-boy dealers, who in turn mocked the 
slickness of their cufflink-sporting counterparts. For my part, I 
yearned to be a rough and ready dealer, out getting hammered with the 
other market-makers every lunchtime, but - in the caste system that was 
the stockmarket - I was doomed to remain on the broking side of the divide.

        It was 1997 - I was 19, suited and booted and fresh out of 
school. The dotcom boom was in full flow and the firm's corporate 
finance department was inundated with new companies wanting to ride the 
internet wave and list on the market. All this extra work meant many 
more hands were needed on deck in the junior department. A few new faces 
were brought in and I - by virtue of being the only one who had even the 
slightest clue how the dealing room operated - was put in charge of our 
little team. All of us were urged to take the relevant exams as soon as 
possible, so we could start trading for clients in our own right. I made 
it my mission to be the first to make the leap from junior to broker and 
suddenly I was propelled from dogsbody doing menial tasks to the lofty 
position of partners' assistant.

        Paul was my overall boss and tormentor for the entire time I 
spent working for the partners. He ran the Middle Eastern side of the 
business and took his role incredibly seriously. I spent all day hunched 
over my Reuters terminal, watching minutely every move of the FTSE 
stocks for him.

        Back then, not a day went by without yet another minnow doubling 
in price as the punters piled in. According to one of the partners, the 
next big thing was going to be Company C. This was a cash shell - a 
listed company with some funds on its balance sheet, but otherwise no 
operational business - and our firm's finance department was negotiating 
a deal to reverse a new internet company into it, which meant the sky 
was the limit in terms of its future share price. Officially, there were 
Chinese walls between the finance department and the trading room, which 
meant the brokers shouldn't have been privy to any of the impending 
deals being thrashed out upstairs. In practice there was no such thing - 
and no one batted an eyelid in the compliance department.

        None of the brokers would be so brazen as to trade any "house" 
stocks in their own account, as their personal trades were far more 
likely than their clients' to be scrutinised, so most people just bought 
Company C for their favourite clients and took their cut through the 
commission they charged. Other brokers displayed even more chutzpah, 
setting up accounts in the names of trusted friends, then washing trades 
through their accounts and taking their cut of the profits in cash.

        As I had no clients of my own, I told a friend's older brother 
what was going on with the stock - which had risen stratospherically by 
now from 15p to more than £1. He loaded up, strapped himself in for the 
ride, and within a couple of weeks was selling them back to the market 
at more than £4 apiece. He sorted me out in the currency I favoured most 
- vacuum-packed bags of skunk - and we all did nicely out of the 
experience. Thus began my education in the low-level insider trading 
endemic in every City firm - whatever the authorities would have you 
believe.

        As one partner explained it to me, "If you've got a son who's a 
doctor, then he'll give you a free check-up when you need one. If your 
dad's a lawyer, he'll do your conveyancing for nothing, won't he? So if 
your best friend's a broker, you'd expect him to toss you free money 
when it's on offer - that's what we do." That all sounded sweet as far 
as I was concerned: I was yet to find anything that turned me on more 
than fast cash and the chance to flash it about.

        Our firm was a self-styled boutique brokerage, with a small and 
exclusive customer base - captains of industry, property tycoons, pop 
stars and minor celebrities. Many sat on the boards of public companies 
and were more than happy to brief us about their own shares. No matter 
to them that they were under obligation not to divulge financial 
information when their firms were in "closed periods" (the two months 
before they made public their annual results and trading statements); 
they used coded signals and texts to get the message out that the time 
was right to buy or sell their stock, before the public got hold of the 
information.

        The brokers greedily devoured the morsels they were thrown - 
after all, being in the know is everything in stockmarket circles. If a 
takeover bid was coming for a certain company, you could guarantee those 
close to the board would have a quiet 50 grand punt on the stock in the 
run-up to the event. And when the right people bought, it sent a signal 
to the partners to fill their own personal accounts with the shares, 
too, before they passed on the tip to their friends in the market and 
really got the ball rolling.

        The brokers could also rely on their friends at other trading 
houses to pass on any nuggets that came their way. Our brokerage wasn't 
considered competition by the market colossuses - if anything, we were 
akin to the birds that feed themselves cleaning hippos' teeth, and the 
relationship suited both parties. Many of the top traders and market 
makers at the major firms had their personal accounts with us. 
Technically they were obliged to report their dealings to their own 
compliance officers, but if another brokerage carried out the trades, 
there was much less scrutiny of whether they'd put their own interests 
before those of their clients.

        They'd call and tell us what to buy in their names, then say, 
"You should have some of those yourselves; we're about to run the price 
up." Once everyone was on board, that's exactly what happened. The 
market is run on a "for us, by us" mentality.

        There were financial journalists who were just as deeply in the 
pockets of the industry and broking figures. If the morning papers 
carried reports of bid rumours for a stock, you knew that whoever was 
the source of the whisper had already loaded up on stock for themselves. 
For the journalists it was a self-fulfilling prophecy - once they'd 
reported the story, their readers would witness the meteoric rise of the 
shares during the course of the day. Any trader who tipped off the the 
city pages' gossip columnists could count on maximum exposure, thus 
giving their stocks a welcome fillip when the market opened next day.

        If the story had legs, the company involved would put out a 
"response to press speculation" announcement and confirm that they were 
indeed in bid talks - so the shares would rocket and those already in 
would be laughing. If the story was false, chances were the price would 
spike initially as the so-called "mug punters" piled in, giving those 
who'd bought the day before the chance to offload their stock; and by 
the time the company denied any bid, the only people left holding the 
baby were those sucked in by the paper's eager reporting of the rumours.

        Either way, journalists played as important a part as anyone in 
the ramping of share prices, which is why they were treated with such 
deference by brokers and company executives alike. "Buy on rumour, sell 
on fact" was an adage to which we all stuck - the real moves in price 
came long before companies issued official guidance about their 
activities. And, for all its bluster, the FSA - set up to regulate the 
industry - never did anything to address the suspicious moves in 
hundreds of share prices every week.

        While insider trading - dealing stocks with the benefit of 
knowledge not available to the public - is strictly illegal, it is also 
so rife among City firms as to have become all but institutionalised. 
Knowledge is power and since, in the world of finance, power is money, 
it's little wonder that however hard the FSA tries to stamp out the 
abuse, those who call the shots in the City try even harder to get away 
with it. As Jonathon Crook of the law firm Eversheds said recently, in 
the wake of the HBOS scandal (when the bank's share price fell by 20% 
following carefully planted rumours that it was in trouble), "The 
effectiveness of the FSA as a prosecutor remains questionable. While it 
has had some success on relatively straightforward cases, it has yet to 
prove its mettle on a major matter."

        Calls that came through to the dealing room were taped, but 
mobile phone calls were not; nor were text messages monitored. Chats in 
local bars and pubs provided equally secure ways to circumvent 
compliance procedures. These were people who wouldn't steal from the 
supermarket but thought nothing of the way they robbed the rich to make 
themselves even richer. Every illegally gotten piece of information was 
depriving outsiders of the chance to trade the markets on a level 
playing field. For every penny made illicitly, by definition someone had 
to lose in return. Spoofing the public into buying shares via newspapers 
or by spreading rumours was highly questionable, but in a world in which 
morals are defined by the standards of those around you, who would point 
the finger?

        It was a similar story with drugs and alcohol. When the FSA 
periodically announced it was mulling plans to perform random drugs 
tests on traders, many in the industry were privately up in arms, 
questioning why they should be subject to such draconian measures when 
doctors and nurses - "who are playing with people's lives" - were not. 
It didn't occur to them that being in charge of millions of pounds of 
clients' money was a similarly enormous responsibility.

        Part of my unofficial role as assistant to the partners was to 
pick up their drugs, for which I was tipped in cash as though I were a 
shoeshine boy outside Moorgate station. Coke was just another way to 
flash one's wealth, as well as get the same buzz after the market shut 
that trading provided during the day. For all that everyone loved the 
moment they closed out a winning position, there was a postcoital 
depression that is the curse of gamblers of every persuasion. Drugs and 
drink filled the void. Though doing coke during office hours was 
generally frowned upon, a hard drinking session over lunch was laughed 
off by the other brokers, even when it caused people to fall asleep at 
their desks or be so addled that they hit "buy" instead of "sell" when 
dealing on the screens. In the City, excess was to be admired and blind 
eyes were turned to any indiscretions - so long as the guilty party was 
a financial asset to the firm in the wider scheme of things.

        Certain clients even expected such behaviour from their brokers, 
viewing their antics as proof that they were so good at their job, they 
were given free rein to behave as they pleased. I routinely had to 
entertain clients for marathon 12-hour sessions which involved supplying 
them with whatever drugs they desired on top of £1,000 lunches. 
Broker-client relationships existed through a prism of false mutual 
adoration - the broker lavishing praise on the client to curry favour 
and keep his account, the client doing likewise to ensure the best 
service, best advice and, most importantly, best off-the-record tips.

        The ecosystem worked very nicely for all those on the inside of 
the Square Mile-sized gentlemen's club that was the City. It wasn't what 
the FSA had in mind when it periodically promised to clean up the world 
of finance, but by monitoring the situation from afar, it was never 
likely to penetrate the opaque sheen that allowed duplicity and double 
standards to flourish unchecked within broking houses. Occasional 
censures were handed out, but no one I knew was ever caught for their 
crimes, and with neither peer pressure to play fair nor intervention 
from on high, it was no wonder the City continued to adhere only to the 
law of the jungle.

        The basest instincts come to the fore when the name of the game 
is money and your standing in society is based purely on how much you've 
made and how fast you've made it. I was as guilty as the next man of 
adopting this skewed outlook - but it wasn't until I left it all behind 
me that I realised how deeply I'd been bitten by the lust for lucre. 
When I was trading millions on behalf of my bosses and clients, I saw 
nothing amiss about spending £300 on a McQueen sweater or half a grand 
on a drug-fuelled night out. Cash that could be made in an instant could 
be spent the same way, and there was always more where the last wad came 
from - no matter how ill-gotten the gains or how unscrupulous the 
process of acquiring the next haul.

        In the end, I got out because it was clear to me that it was a 
case of now or never. Spending all day with men in their late 30s who 
couldn't see past the next deal, the next line of coke or Porsche 
Carrera set alarm bells ringing in my head - if I didn't want to turn 
out like them, I had to hang up my trading boots. Much as the casino 
atmosphere was limitless fast-paced excitement for a boy in his mid-20s, 
as a long-term lifestyle choice it was too shallow and superficial - it 
wasn't worth selling my soul.

        *Trading is as addictive a pastime as any other form of 
gambling, and as any drug. It becomes a way of life - a way to define 
yourself, to convince yourself you are the centre of the world and 
believe that you are abundantly powerful in the grander scheme of 
things*. Hitting a button and effecting a seven-figure transaction is 
the stuff of fantasy for most people in the real world, but when you've 
been doing it every day since you were 19, you soon lose your sense of 
reality and get swept away in the carnival atmosphere.

        Sipping a quiet pint in the pub after an adrenaline-packed day 
riding the market rollercoaster doesn't quite sate the appetite, so 
heavy drinking, hard drugs and all the other trappings of overindulgence 
soon become standard fare. But the plight of the trading addicts is 
masked by their clothes, jewels, cash and "success" - few question their 
happiness, since they seem to have it all. These aren't junkies huddled 
under railway arches begging for loose change, but their entrapment is 
no less acute - quitting is as hard for a trader as it is for a heroin 
fiend.

        I don't say this in an attempt to solicit sympathy for the devil 
- I've got none myself, and wouldn't expect anyone else to be brimming 
with compassion for the City traders, either. *Instead, thought should 
be spared for those members of the public whose chances of investing 
successfully are greatly impaired by the innate corruption of the Square 
Mile, and the inaction of the authorities who are meant to police the 
City*. Until a crackdown occurs, there'll never be a change in how 
business is done in the stockexchange - there wasn't throughout my 10 
years on the inside and, judging from the tales of friends who are still 
trading, there hasn't been since I left. The public might feel justice 
has been done when the likes of Nick Leeson and Jerome Kerviel are 
caught red-handed - but the truth is that they are just the tip of the 
iceberg.

 

· The names of individuals and companies, and some other details have 
been changed.

 

[U:Evidence:Tricks of the Traders]

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