Writing from the road...
We have written many times about manipulation in this column. We seek justice and fairness in the markets that we continue to consider "free". First some thoughts on the trail of trader-speak I've been pouring over recently.
The takeaway is this: getting over the circumstantial evidentiary bar to be permitted to get to discovery was a big deal. Rosa Abrantes has done much to get these cases as far as she has. But now, forensic work at the operational level is needed. And it just is not easy to prove the cases. Now, even with chats and trade logs, the facts can almost never be known.
Within the constraints of our legal system, it is much harder to prove manipulation then the plaintiffs would have you think. This refers to the precious metals cases, the current FX cases, and the pending treasury cases.
We are now at the discovery level, thousands of documents with chats and messages back-and-forth between traders are available for the plaintiffs to review. This is great. But can the lawyers understand intent from written words?
He was just kidding! Can you prove otherwise?
PROVING INTENT IS NOT EASY
This is because the facts needed to prove "intent" are in the traders heads. And without intent you cannot win.
In the three legged stool that is the legal system, intent is hardest leg to establish. I think "means, and opportunity" are the other 2.
Trader conversations are not prose, to say the least. It is near impossible without inflection and confirmation in chats to determine, or differentiate sarcasm from sincerity. How can one divine intent from a chat where a trader alternately asserts he's infallibly correct in an opinion, and then laughs at himself for having such an outrageous opinion? No, the burden of proof that the plaintiffs must satisfy is very difficult in this circumstance.
Note my own spelling in these very articles that the Soren K group posts. My own trading messages were difficult to translate let alone divine my intent. Frequently brokers would object to my horrible typing. I would respond with
"My misspelling is protection against your execution error. If you mess up I can always blame you for not clarifying." I would then follow that with a LOL.
Was I joking? How can you tell? Frankly, I was truly sloppy and not detail oriented. But it also served to me as a hedge against what sometimes was poor service. I insisted on clarification. This was one way I got it.
PERSONAL EXPERIENCE SAYS TRUTH WITHOUT FACTS LOSES
In one instance I was subject to an eight hour deposition regarding a manipulation case in natural gas options. It Involved a major bank in Canada, a major energy exchange, a multibillion-dollar hedge fund, a new electronic trading platform, and traders who executed on that platform of which I was one.
I was a material witness and wasn't a party to either side of the prosecution. But I ended up essentially being an expert witness because of the questions asked by one excellent attorney.
It was clear that they were not able to divine intent at the trading and forensic level of other participants in that scandal. They sought evidence of manipulation between the hedge fund and a bank employee. There was none to be found in the trades, or chats as damning as they may have been in appearance.
It was that day that I learned in the legal world, conditional probability and narrative do not hold up when there are no facts to back it up. TRADERS USE CONDITIONAL PROBABILITIES TO MAKE DECISIONS IN UNCERTAINTY. JUDGES RISK NOTHING. IT ALL COMES DOWN TO FACTS. WITHOUT FACTS, A CASE GETS SETTLED ON THE COURT STEPS. And the facts proving intent were in the peoples' heads. Short of a download of their brains the cases cannot be won easily.
It was made obvious to me later by my own attorney that the focus should've been on something entirely different then the line of questioning being asked.
His advice was meant to let me know that if something was going on it would've been impossible for them to divine it from trying to figure out what traders are doing and why they're doing it.
The plaintiffs actually settled days later in part most likely because of the information given during my testimony. Ironically months before my deposition, one of the law firms' 'expert consultants tried to hire me for their case. They actually called me seeking me as an expert witness.
My response was "I am qualified to do this, but if you check your list I'm a material witness in the case as I participated in the trades." Based on their discovery interview on me, I now know that case would have ended differently had they been able to translate, correlate and corroborate trades to chats.
HFT IS EASIER TO PROVE
It is actually easier to prove intent in HFT cases. And that is because the programming used is essentially a trader's intent in code. Programmers write down exactly what the trader wants to do!
But that won't happen as long as it is run by bigger players. Mike Coscia was an impediment to other bigger firms' HFT rigging. Ask NANEX's Eric Hunsader. Once you get a hold of a firm's programmer, intent is easily proven. This is why you will increasingly hear
"The programmer is privy to proprietary secrets and cannot be deposed."
Secrets as in INTENT TO SPOOF"?
CHATS DO NOT PROVE INTENT
Reviewing some of the Gold and FX conversations, even in context of the actions, is not such an easy proof of manipulation as the prosecutors would have you believe. It seems to me that the plaintiffs have a less than 50/50 chance of conviction and will settle on the court steps if they scare the defendants sufficiently.
Deutsche bank in our opinion was a fluke. A fluke because they had much bigger fish to fry with the DOJ. Why else would a bank walk away from its London precious metals vault only two years after opening?
LOST IN TRANSLATION
The Gold, Silver, Fx and now the Treasury manipulation cases are not easily proven using facts. And our legal system just does not burn witches without proof anymore. Having been a material and expert witness in these type things, the accusers are not usually prepared for the arcane speech traders use.
Just as when a lawyer says "res ipse loquitor", a trader can say, "it's going down, I guarantee it! Lol." And no one an KNOW what he really intended. How can the plaintiff prove that the LOL is him not mocking himself?
Often times it is self recognition of his own failure, hubris, and ego. This, as opposed to him laughing at some unsuspecting victim. So, given this, how can the plaintiffs pretend to know what goes on in the traders mind? There is lexicon, trader sarcasm, wishful thinking as opposed to willful manipulation, and the old adage that "no one is bigger than the market."
FACTOIDS ARE NOT FACTS
Point here is that to win, all the defense has to do is make it clear that no one can know what the words written were intended to convey. In a legal system that needs facts, and where those facts are in the heads of the chat writers, it is not a slam dunk to get the evidence recognized as fact and not interpretation of what we feel a person may or may not have intended.
Lacking expert forensic preparation that links and correlates the chats with time stamped subsequent actions, all the plaintiffs will likely get is conjecture and muddied waters. Facts will not be proven we bet. Not without narrative and contradictions found in discovery process. A ton of circumstantial material will not substitute for a real fact.
And unless litigators can prove contradiction of deposed traders on the stand between what they wrote, their actions, and what they say in discovery, the case is not easily won. Read what Matt Levine has to say on the topic below.
by Matt Levine.
My basic theory of post-crisis financial scandals is that the main illegal thing that traders do is send each other dumb emails and chat messages. So many of these scandals are hard to describe in objective terms.
The Libor scandal was about submitting fake numbers in Libor surveys, but even non-scandalous Libor submissions were pretty fake, so the only way to distinguish the bad fakes from the good ones was by finding chat messages saying things like "LOWER MATE LOWER !!" What was scandalous in the foreign-exchange-fixing scandal was that banks traded ahead of customer orders, but that was also legal; what was illegal was the dumb chats between those banks sharing customer information. The chats and emails are evidence of substantive illegality -- illegal collusion, manipulation, etc. -- but also display an attitude.
If they were written in dull legalese, they would have created much less of a reaction; regulators might not even have noticed the problem. But they weren't; they were filled with obscenity, slang, misspelling, and promises of Champagne, all of which tend to enrage prosecutors and juries and the public.
Anyway I enjoyed this story about the irreducible atomic unit of dumb trader chat: A five-word message to a rival banker was enough to cost former Citigroup Inc. trader David Madaras his job as the bank fought to appease regulators probing the foreign-exchange scandal engulfing the industry.
Citigroup’s Timothy Gately disclosed the message on the first day of Madaras’s employment lawsuit in London Tuesday. The executive said the April 2011 chat constituted gross misconduct and firing Madaras was the only appropriate sanction. "he’s a seller/fking a," Madaras told a rival trader who had just disclosed the identity of a client, Gately said in a filing prepared ahead of the hearing.
That chatroom message "validated an external trader’s disclosure of a client name," Gately said in the filing. The first three words -- "he's a seller" -- are substantive misconduct, disclosing a client's order to a competitor, and enough to get you fired in an atmosphere of heavy scrutiny of that sort of thing.
The next two -- "fking a" -- are substantively superfluous, but you can't have a scandalous trader chat without obscenity and misspelling. You can't imagine a trader actually being fired for typing "he's a seller," but of course one was fired for typing "he's a seller/fking a." This is partly a matter of psychological makeup -- how could the traders resist cursing? -- but it might also be a matter of technology. What search, what flags, brought that chat to the executives' attention? Does compliance monitor every time traders type "he's a seller"? (Presumably they type that a lot!) Or is there a search for "fking," and other variant spellings, that triggers review?
Read more by Soren K.Group
Read more by Soren K.Group