The regulator in March fined Deutsche Bank £190,000, or about $366,000. It also ordered the bank to disclose to clients in the future if it planned to trade in advance of winning their bids. Deutsche Bank says it "takes its obligations to its customers very seriously and therefore regrets the misunderstanding with an experienced institutional customer." It adds that clients continue to give it a high rating for its order execution and willingness to risk its own capital to fill their orders. The case unleashed a debate about how brokers should handle blind bids on giant trades of multiple stocks at once, known as program trades. U.S. laws, while barring firms from front-running actual orders, don't explicitly prohibit trying to do so with orders not yet placed. Still, says the SEC's market-regulation chief, Annette Nazareth: "The closer you are to understanding that a customer is going to imminently place an order, the more you would have an obligation to act in the best interest of that customer." One firm, UBS, told clients this year that it wouldn't trade on information it learns in advance of winning a blind bid. But Deutsche Bank and Goldman Sachs, both major participants in blind bids, made clear to clients that what they learn about future transactions may be fodder for their own trading. Deutsche Bank told clients in a letter that it "may take into account information you pro-vide...and information held regarding your previous trading activity" to trade in advance of orders. The bank maintains it has a right to start buying and selling right away to "mitigate our exposure, and as a result be competitive in pricing." The winner of a blind bid often has to put capital at risk, by temporarily owning some of the large number of securities to be traded. Goldman says that pre-hedging "enables us to offer liquidity to our clients at a more reason-able rate," but that it won't do it if clients instruct it not to. Some clients are indeed resisting. Barclays Global Investors, a money-management unit of Barclays PLC, says it has warned brokers in both the U.S. and the U.K. that any informa-tion it gives them to decide whether to bid must not be used to take action in the market. Back Books The unit of a securities firm that handles proprietary trading often is walled off from customer activity. But besides regular proprietary trading, some firms hand over chunks of their cash to traders housed on or near the big floor where sales brokers constantly receive client orders and sometimes shout them out. The traders who run such accounts â called "back books" â often get to keep a percent-age of the profits the accounts earn. They aren't allowed to trade in a stock while the firm is actively handling an order for that stock. Nonetheless, they have the advantage of being very close to the market â aware of the buzz about individual stocks, the general tenor of the market and what some of the smartest big investors are doing. Securities firms view back books, also called proprietary accounts, as a perk to help keep top traders from leaving for lucrative jobs at hedge funds or other private investment pools. In recent years, firms including Goldman, Merrill Lynch & Co., Citigroup Inc. and Credit Suisse First Boston have given proprietary accounts to traders situated within divisions that receive clients' orders. Though this is legal, it must be closely watched to ensure that "the proprietary trading isn't based on customer orders," says the NASD's Mr. Luparello. "Back books are a convenient place for abuse to be hidden." SEC enforcement chief Stephen Cutler, at a securities-law panel in New York last month, said traders who do both proprietary and customer trading present "a very problematic issue" that's "very difficult to grapple with." Many firms say they try to situate traders with proprietary accounts out of earshot of the main floor. Merrill Lynch, according to some of its former traders, placed a small proprietary-trading operation last year just 20 feet or so from traders who call out customer orders. The firm said the traders are "separate" from the "football-field-size" main trading floor. "They don't have access to customer information and are subject to daily surveillance," a spokeswoman said. She said the reason they weren't put somewhere else entirely was that the firm viewed its placement as sufficiently separate. Wellington Management Co. complained to Merrill last year that its back-book traders could trade on knowledge of pending orders. Merrill sought to reassure the big Boston money manager, saying the accounts were small and unlikely to affect stock prices. Trading officials at Wellington declined to comment. Back books were at issue in the Knight Securities trading in JDS Uniphase that was aired in an NASD arbitration. The firm, a unit of Knight Trading Group Inc., let traders who have back books keep as much as 25% or 30% of the accounts' profits, one trader testified. According to testimony of Knight's former head of stock sales, Robert Stellato, who brought the arbitration claim, at least six traders began buying JDS shares for their back books right after Oppenheimer Funds placed its large order for JDS stock.
Mr. Stellato testified that there was "great concern" among the people who receive customers' orders "that if the regulatory authorities ever looked at the back books of this firm that the firm was going to be locked up." He had complained to his bosses about various types of alleged improper trading, and he said his complaints were the reason he was asked to leave the firm. Knight said his job performance was the issue. The arbitration case concerned Mr. Stellato's claim for money he thought Knight owed him. The arbitration panel turned him down on the money issue, aside from a small pay miscalcu-lation. The panel didn't rule on the substance of his allegations of improper trading at Knight. Instead, back books are expected to be among the subjects of final enforcement orders coming from the SEC and the NASD's enforcement arm. Knight has tentatively agreed to pay $79 million to settle the matter, without admitting or denying the findings. The actions broadly allege that Knight failed to properly supervise back books and delayed filling client orders in order to trade for itself â pocketing tens of millions of dollars. The penalty is expected to include a restitution fund of about $41 million, going to high-profile clients such as Fidelity Investments and T. Rowe Price Group Inc., among others.
the bottomline is bankers are crooked didn't we know that already ? in the securities trading industry the only people that are clean are off floor futures traders and CTA's