Barclays Bank PLC and its New York branch agreed to pay US $150 million to the New York State Department of Financial Services to resolve charges related to a “Last Look” feature on its automated electronic foreign exchange platform — BARX. This feature – which imposed a slight delay between customer orders and their acceptance and execution by the firm – was intended to prevent Barclays from being taken advantage of by electronic traders who might react faster to market developments in foreign exchange than Barclays’ platform, said NYSDFS. However, claimed NYSDFS, from 2009 to 2014, this feature was also used by Barclays to reject orders from customers that would be profitable to customers and unprofitable to the firm. According to NYSDFS, “Barclays did not seek to distinguish toxic order flow from instances in which prices merely happened to move in favor of the customer and against Barclays after the customer’s order was entered on Barclay’s system.” Moreover, alleged NYSDFS, on occasion, when customers questioned the reason for the rejection of their trades by BARX, Barclays “failed to disclose the reason that trades were rejected, instead citing technical issues or providing vague responses.” In addition to agreeing to pay a fine, Barclays also agreed to fire the Managing Director and Global Head of Electronic Fixed Income, Currencies and Commodities (eFICC) Automated Flow Trading that oversaw BARX; the Global Head of eFICC previously was terminated. Barclays previously paid US $503 million to NYSDFS to resolve allegations related to the manipulation of spot foreign exchange. (Click here for further information regarding Barclays and other banks settlements related to allegations of Forex manipulation in the article, “Five Banks Plead Guilty to Forex Manipulation Activities and Agree to Fines Totaling US $5.6 Billion and Other Sanctions” in the May 31, 2015 edition of Bridging the Week.)
Culture and Ethics: As I wrote back in May 2015, “It can only be hoped that [recent] settlements of alleged acts of Forex manipulation provide the last revelations of major inappropriate conduct by financial service industry companies and their employees. Unfortunately, this may not be the case, as there appear to be continuing investigations into electronic trading of Forex and Forex-related products as well as the price-setting process for gold, silver, platinum and palladium. Hopefully, though, financial service firms have minimized the likelihood of future incidents of such illicit behavior by not only implementing better internal controls to prevent and detect such potential issues earlier, but by enhancing overall compliance cultures. This can be encouraged through enacting compensation schemes that better reward and penalize good and bad behavior (not only by line employees, but by their direct and indirect supervisors as well), and by repeatedly educating employees not only about their legal requirements, but also about their ethical obligations too. (Keep in mind the ‘grandma test:’ don’t engage in conduct you would not be proud for your grandmother to read about in her morning tabloid.) It’s not just about avoiding the line between black and white, but about staying out of the zone surrounding such lines altogether. For sure, implementation of better internal controls is critical to prevent and detect potential violations. However, such controls cannot solely be reliant on quantitative analysis and metrics. Such controls must include the intuitive analysis of trained and seasoned professionals who can piece together different metrics and detect issues through application of the ‘smell test’ as well as through application of complex formulas!” This was good advice in May 2015, it is good advice in November 2015 – and it will be good advice in the future too and regularly worth repeating!