Pre-Hedging = Front Running = Theft = Crime ?

 What will be next?

More than USD 10 Bio in fines spoken during 2014/2015 for the period from December 2007 to January 2013.

What happened since?

The Industry reacted and created their own version of reality.

In 2017 it is called “Terms of Dealing” and the “Global FX Code.”

“The Firm conducts its principal transactions with you as an arm’s length counterpart and does not act as an agent, fiduciary or financial advisor or in any similar capacity on your behalf in relation to these transactions.” (March 2017)

“Market making and risk management activities may impact the prices communicated to you for a transaction and the availability of liquidity at levels necessary to execute your orders or trade requests. These activities may also trigger or prevent triggering of orders, take profit orders, barriers, knock-outs, and similar terms or conditions.” (March 2017)

“The bank may also transact in the same or related Products for the purposes of its market making and risk management activities. The bank retains discretion as to how to satisfy such competing interest, including with respect to order execution, fill quantity, aggregation, priority, and pricing.” (March 2017)

When you indicate your interest in a potential transaction or provide us with a request to enter into a transaction, we may use that information to engage in pre-hedging and hedging activities, which may include entering into transactions prior to executing your potential transaction or request with a view to facilitating your potential transaction or request.” (March 2017)

U.S. Prosecutors have a different version of reality in 2017.

The Trial of the “fall guy.”

Bloomberg October 23rd, 2017 “Ex-HSBC Currency Trader Convicted of Fraud for Front-Running.” 

U.S. v. Johnson, 16-cr-457, U.S. District Court, Eastern District of New York


There is one fundamental question about this case.

Did Marc Johnson get convicted for what he did (pre-hedging) or how he did it (sweary phone calls & lie to his customer about Russian buyers)?

Judging from the initial official and unofficial comments, the focus seems to have been towards what he did. Even, it would have been practically and mathematically impossible to sell 3.5 Bio USD vs GBP in a 60-second window without pre-hedging, the verdict seems to be focused on exactly this action.

Should there not be more clarity coming from the sentencing, then push the “FX Global Code” and the “Terms of Dealing” through the next shredder. The FX business, conducted by “Principals” will need to change fundamentally and possibly could be a lost cause. Looking over to the big brother, the Equity market, the move to an agency model would likely be a possible outcome for the FX market as well. With all the new Regulations, like MiFID II and MAR, such a move to Agency business might reduce some of the revenues but will also keep banks out of courts.

All the below comments sound to me like “pre-hedging = front running = theft = crime”!

Further comments on this case, shed a light of what is in the cards:

From the Department of Justice “Press release”:

“The former head of global foreign exchange cash trading at HSBC Bank plc, a subsidiary of HSBC Holdings plc (collectively HSBC), was found guilty today for his role in a scheme to defraud an HSBC client through a multimillion-dollar scheme commonly referred to as “front running.

“Guilty of one count of conspiracy to commit wire fraud and eight counts of wire fraud.”

“This case involved a complex fraud scheme to ‘front run’ a foreign exchange transaction in order to generate millions of dollars in illicit profits for HSBC, which also indirectly benefited individual traders,” said Inspector General Lerner. (Author: ILLICIT = Forbidden by law, rules, or custom)

“Johnson then caused the $3.5 billion foreign exchange transaction to be executed in a manner that was designed to “ramp,” or drive up, the price of the Pound Sterling, benefiting their proprietary positions and HSBC at the expense of their client.”

“In total, Johnson and the traders he supervised generated HSBC profits of roughly $7.5 million from the execution of the FX transaction for the victim company.” (Author: This is about 21.5bps)

To make matters worse, denial seems to be all over the Industry. Even in 2017.


What will be next?

This sends a signal to traders and banks that this type of behavior is absolutely inappropriate and will be pursued by the government,” Michael Weinstein, a former Justice Department trial attorney, said. “That’s a big hammer over the banks — it may force them to monitor and self-regulate their people.”


Proper surveillance of trades and people can only be implemented when there is a standard/official “version of reality.” The “FX Global Code” and “Terms of Dealing” will provoke the next “big hammer” for trades done today, until Regulation is in place.

This is an opinion piece with no defined call to action.