I work in finance (although on the buy side), my gut feeling is that it's the usual suspects: big investment banks. The people manning the prop desks in these institutions get to know each other eventually as the landscape is fairly small and they all work for/with each other eventually.
This means that cliques along the lines of "I'll scratch your back if you'll scratch mine" form naturally. It's almost impossible to prevent as a lot of the trading happens directly between traders and never crosses exchange boundaries and even then, it's often tricky to prove collusion purely based on the trades. Official trading communication channels are monitored, but this is irrelevant if the deal can be pre-arranged privately off channel.
There are too many conflicts of interest in the entire industry really. It's not in the best interest of the banks to monitor their internals too closely. Sure, there are plenty of theatrics and checkbox-ticking exercises, but really, as long as it is cheaper to pay the eventual fines than to employ armies of auditors and actually give them the motivation and power to enforce the rules, it's not happening.
The internal controls themselves can be fairly annoying too. I remember a 6 month effort to get our legal department to clear a US fund launch because their incentive was to just reject every proposal. They don't directly get to see the benefits of a successful product, but would certainly feel the pain of one that gets into trouble for whatever reason.
> It's not in the best interest of the banks to monitor their internals too closely.
So keep raising the fines. make them proportional to the banks turnover, or their perceived size if it appears that they are trying to disguise profits. The leadership of the banks need to follow the rules too, and make sure that the organisation follows those same rules. Maybe they should be held accountable when that doesn't happen.
As we found out when Health & Safety legislation was enacted which did this, it turns out that when you start holding people personally accountable for their actions (or lack of), then changes start to happen in the culture of the workplace. I walked around a factory recently and they take the health and safety of themselves, their colleagues and their visitors very seriously.
Seems like an effective approach to any fines would be to sum up the estimated profits they made, add in the estimated cost to innocent parties, then multiply it by some number.
Of course that relies on someone actually being held accountable for a change...
Alas, I don't think this is going to happen, because financial accidents are rarely gory so it's tricky to mobilize the masses. If someone gets pounded to pulp by a power hammer, that will get plenty of visceral coverage and politicians will latch on to score easy cookie points for being seen "committing good deeds".
Finance is too abstract for this to work. "Big Bank Co ABC defrauding other institutional clients by XYZ billions" is so far removed from common folk that they can't relate to it. Some politicians will make some token moves, which (as described in another comment of mine) will just end up funneling some money into another special interest group and that's it.
I wish people more readily accepted they human lives have a monetary value of some degree. If you cause a lot of monetary damages to a large number of people then that's going to lead to a cost in human lives. This way people might more readily accept what impact this kind of defrauding has.
> The people manning the prop desks in these institutions
The Volcker Rule (part of Dodd-Frank) prohibits prop trading at banks (with few exceptions). The big banks have been actively discouraging it as well, changing comp structures to avoid rewarding prop trading.
> trading happens directly between traders and never crosses exchange boundaries
All these trades still need to be cleared, no? There's a structure to markets that you're papering over here.
> It's not in the best interest of the banks to monitor their internals too closely.
You may think this, but traders at banks are subject to tons of surveillance. Banks take lots of measures now to catch rogue traders even if it's just because they don't want dirty laundry being aired publicly.
> The Volcker Rule (part of Dodd-Frank) prohibits prop trading at banks (with few exceptions).
Ok, replace prop trading with a fund trading OTC products that the bank runs.
> All these trades still need to be cleared, no? There's a structure to markets that you're papering over here.
They do, and as I wrote in a bit that you didn't quote, it's largely irrelevant because it's not that difficult to hide collusion. Heck, the guys fixing LIBOR did it successfully even with all the controls you claim the banks put in place.
> You may think this, but traders at banks are subject to tons of surveillance.
Yes, there is tons of surveillance. There is (in my experience) fairly little actually effective surveillance. For once, surveillance is never an interesting task. I consider it the same as guard duty. 99% of the time, nothing happens. Humans are not good at catching unexpected outliers. So you automate a lot of the checks, but these either produce too many false positives and thus bury the true problems in the noise, or they can be circumvented.
As I wrote, I consider the root cause to be a problem of incentives and conflicts of interest. No amount of patching with egregious audit and or lawyering will fix this. I consider statements like "but look at all the checks we already do" theatrics.
Look I'm in the industry. I have to complete 5 different training and educational courses every month, spanning from market abuse, to insider trading to fraud. Nobody takes this crap seriously and it is broadly considered a complete and utter waste of time. We have to fulfill a bazillion reporting obligations, but all of it is just a thin veneer of compliance to tick checkboxes. Every year, some chums from KPMG/PwC/<insert alphabet soup> come around, check that there are no obvious problems and rubberstamp everything. They find some token things which get reported and rectified so it looks like they actually do something.
I have friends who work in compliance/audit departments, and even those who want to do their work properly, run into problems because it's tricky to put heat on any group that is making money.
Most people I encounter in the industry are actually honest and hard working. Even though the checks are more or less easily circumvented, the majority of people choose not to do obviously illegal things. But to claim that the current setup is somehow successful at preventing shenanigans is dishonest.
> The Volcker Rule (part of Dodd-Frank) prohibits prop trading at banks (with few exceptions). The big banks have been actively discouraging it as well, changing comp structures to avoid rewarding prop trading.
It's not prop trading...I'm just macro hedging which is completely fine
Absolutely. The bank - advisor (PwC, EY, etc...) relationship is just as riddled with conflicts of interest. It is in the interest of the advisory firm to find a "creative" solution for their clients (the banks). Otherwise the bank would go to a slightly less scrupulous institution. The theatrics apply again, the bank gets to claim to have been audited by a prestigious consultancy, the consultancy gets paid, the authorities get to shovel the problem under the carpet and the specific individuals in the authorities get a cushy consultancy job after their public service. It is not in the interest of any of these players to change anything, so it is not going to change.
> This means that cliques along the lines of "I'll scratch your back if you'll scratch mine" form naturally.
Problem I have with Econ 101 BS is this. Different industry, in the city I grew up in the four large electrical contractors get busted every 10-15 years for bid rigging city and county contracts. They pay fines, no one goes to jail. I feel like this sort of stuff also goes on with private bids, but it never gets called out.
> A European Commission statement Thursday didn’t identify the institutions being investigated for "a collusive scheme that aimed at distorting competition" in trading sovereign bonds issued by euro-region governments from 2007 to 2012.
There's no good reason why those names should be hidden from the EU population. None. It's a disgrace that governments continue to cater to large corporations and allow them to get away with small fines and "admitting no wrong" (despite receiving the fines for the crime done).
A plausible reason is that it would likely impact their market value as shareholder confidence in those banks is affected by the potential for large fines in the near-future. Since the banks haven't actually been found guilty of anything (yet), they're simply being investigated, it would be damaging to release their names.
My point is simply that they haven't been found guilty of anything yet, just charged. If they're subsequently cleared of any wrongdoing, but their market value is tanked by the accusation, they're effectively being punished for nothing.
Here’s one, possible, good reason: the EU has a sort of “whistleblower” defense, where the first company to cooperate in a cartel investigation gets off free. Assuming that bad PR is a significant part of punishment in these cases, it would make sense to delay announcing the culprits here to give one of them time to escape being named.
Bloomberg mentioned Deutsche Bank, Credit Suisse, and Credit Agricole were mentioned in a separate bond trading "cartel". Would not be surprised if they were part of the eight.
