News this month that some banks, including JP Morgan, Deutsche Bank and RBS, would be banning or restricting use of multi-party online chatrooms can barely have come as a surprise to many. These forums have been depicted by regulators and commentators effectively as virtual ‘crime scenes’ where collusion ran rife.
While I don’t mean to downplay any illegality, it cannot be controversial to suggest that collusion in markets has existed for as long as traders have been incentivised by personal gain. The elephant in the (chat) room here is the immediate P&L incentive, rather than the behaviour that takes place within its electronic walls.
It is laudable that regulators and enforcers are seeking to stamp out ‘collusion’ or herd behaviour, to continue the elephantine theme, though many of us humans with long memories are unsurprised that people have been caught orchestrating, collaborating, negotiating and celebrating successful deals. They have been doing so since the beginning of time.
In commodities markets dealers have always ‘colluded’, if collusion is defined by acting in concert; even if such collusion is ultimately to the benefit of all parties to a trade, including the clients. As a one-time trading clerk on the LME, I would usually know in advance which broker would be on the other side of a major closing order during the Exchange’s ‘official’ ring. Two clients, using their respective brokers, required a transaction to be struck across the LME’s trading floor for transparency’s sake, though neither would benefit from a blind bidding (or offering) frenzy during the open outcry session. Better, both clients would inform their brokers in advance where the ‘other side’ of the deal would be coming from, to ensure an orderly transaction was done on a quiet mutual nod. If such a deal was to be orchestrated today in an electronic chatroom, I suspect regulators would take a dim view indeed.
However, chatrooms are a relatively recent phenomenon and while some traders have been caught out by leaving evidence of their ‘collusion’ in employers’ archives, banning the medium is just the thin end of the wedge.
The key point is that it is the collective behaviour, driven by short-term profit/loss incentive, that needs to be enacted upon, rather than the venue where the behaviour took place. If anything, it may be more logical to confine pre- and post-trade dialogue entirely to electronic channels and forums where communication is recorded, than force traders to go off-line, unrecorded, where they may be talking about who knows what?
By killing off chatrooms compliance directors may have ‘shot the fox’, but the elephant in the room lives on undisturbed.