HSBC forex trial, Commerzbank and Alphasense
Martin Arnold and guests discuss the trial of ex-HSBC forex trader Mark Johnson and its potential repercussions for the foreign exchange markets, Commerzbank as it prepares for potential takeover bids, and the impact of AI on the way professional research is done. With special guest Jack Kokko, chief executive of Alphasense.
Presented by Martin Arnold and produced by Martin Arnold and Jack Kokko
Welcome to Banking Weekly from the Financial Times with me, Martin Arnold, the FT's banking editor. Joining me in the studio is Caroline Binham, our financial regulation correspondent, while we'll be joined over the phone by Olaf Storbeck, our Frankfurt correspondent. And there'll be a segment from Ben McClannahan, our US banking editor.
First, we will be discussing the guilty verdict handed out this week to the former head of cash foreign exchange trading at HSBC by a US jury. Second, we'll hear about Germany's Commerzbank and how it's hired investment banking advisors to prepare for a potential takeover bids from foreign rivals. And finally, we'll hear an interview with Jack Kokko, chief executive of AlphaSense, a company that is using artificial intelligence to try to change the way professional research is done.
So starting with HSBC. Mark Johnson, who was HSBC's head of global cash foreign exchange trading was this week found guilty of defrauding a client in a $3 1/2 billion currency deal, which is a landmark legal decision that could have far-reaching implications for the workings of the FX markets. Caroline, tell us a bit about how the trial progressed and what the arguments from both sides were.
Well, I think it's fair to say that there are a lot of nervous Forex traders today in light of Mr. Johnson's conviction. It was a pretty speedy deliberation by the jury. They only took a few days to return the verdict. And that was after only a three-week trial, which, by comparison to UK, the trial was pretty speedy.
Essentially, it was an old-fashioned front-running case. The prosecution alleged that Johnson breached confidentiality due to HSBC's client care in energy. They were about to do a $3 1/2 billion currency trade. And HSBC and Johnson and his traders essentially, armed with that knowledge that the trade was about to go ahead, ramped the price of pound sterling, bought ahead of the trade, and sold after, and therefore, netted themselves a pretty handsome profit.
What Johnson's lawyer said was that actually, this was a very conventional pre-hedging strategy, which is widespread amongst currency dealers. There's nothing particularly wrong with that. And actually, the US were trying to make something criminal that was pretty everyday practise.
Now, Forex markets are renowned for being pretty lightly regulated. And as you said, the defence argued that this was a standard practise in FX markets to pre-hedge, particularly a sizable FX transaction like this. So what seemed to undermine the defence's case for Mr. Johnson?
Well, on your first point, it's correct that back in 2011, which is when the trade happened, Forex was a largely unregulated market. And obviously, since then, we've had the big Forex-rigging scandal. Banks paid about $10 billion worth of penalties as a result of that. And Johnson's arrest at JFK airport was the DOJ's big success. However, it doesn't really have much to do with the rigging that the banks paid penalties for. And I'll come to that in a minute.
However, in terms of what undermined Johnson's case that this was a pretty traditional pre-hedging strategy was some of the emails and the phone calls that the jury heard. And we can play some excerpts now.
I mean, obviously, we got a bit of way to go, right? I don't know what his average is, but as long as it's under that rate, they can't really complain. Right?
If it's over the 3730, they're going to squeal.
If it's over what?
If it's over-- well, it was around 5630 when they called us. Right? I mean, it spent most of morning around 5620, 30. So we should probably make sure we don't ramp it up through there. I don't know what its averages is. I don't know how much it got. Seems that they're starting to bite.
Uh, full amount.
No, you're kidding?
Yes, 2 1/4.
[LAUGHS] Fucking Christmas. OK. All right. Good man. Thank you.
I got that. Bye.
Those recordings of Johnson's comments seem to have been a pretty key factor in undermining the defence-- this was just standard practise, pre-hedging-- and in fact, led the jury to believe that it was more front-running of the client's orders.
Now, there is another element of this case, which is that Johnson's colleague, or former colleague, I should say, Stuart Scott is facing an extradition hearing in the UK later this week. The US are seeking to press similar charges against him. Is that right?
Yeah. So Johnson was indicted with Stuart Scott. They are alleged co-conspirators. So yeah, things have got automatically a lot bleaker for Mr. Scott overnight.
What's going to happen on Thursday is purely on the merits of the US government's extradition arguments. They're not going to be deciding whether Scott is guilty of the same charges as Johnson. It's purely whether the US government is correct to want to extradite him to the US to stand jury trial in the same way as Johnson.
However, one of the arguments that a Magistrates' Court in this country will always deliberate over is the so-called foreign bar. So is this alleged wrongdoing a crime in both countries? They'll be looking at whether any other alleged co-conspirators have already been tried in that particular country. And obviously, Johnson has been tried and now convicted. So in that respect, it doesn't look great for Mr. Scott. However, he will, if he is extradited, face a jury trial in the normal way. And it's always possible that that will return a not guilty verdict.
In terms of DOJ, it's a great philosophical win for them because they have had a few setbacks with transatlantic investigations of late. I'm thinking of the JP Morgan Whale case that they've had to drop in the libel-rigging scandal, which obviously preceded that of Forex. The only convictions that they've managed to secure against a couple of British former Rabobank traders, those convictions have been quashed. And that was over how evidence is shared amongst prosecutors and regulators on both sides of the pond.
They've also got this bigger case that emanates from the Forex-rigging scandal against the so-called Cartel. And those are former traders of Citi, JP Morgan, and Barclays. And those are the traders that wrote the emails that really became infamous during the Forex-rigging scandal.
In a way, they really don't have anything to do with Johnston's case at all, beyond the word Forex within the DOJ's press release. And it's going to be a much more interesting case to see how that progresses. Those cartels, so-called traders, haven't fought extradition, though they're all British-based. And they're going to try their luck in New York and are currently having some pretrial hearings right now.
Yeah, and that's an antitrust case, where they were allegedly colluding to try and move markets in their favour rather than specifically front-running a client's orders.
All right, Caroline. Thank you very much.
So turning to Commerzbank, Germany's second largest listed lender has drafted in financial advisors at Goldman Sachs and Rothschild as it braces for potential takeover bids from European rivals. Commerzbank is one of the biggest lenders to the German Mittelstand, which is the network of small and medium-sized companies that form the economic backbone of Europe's largest economy.
So there is an attractive business there. But the bank has been beset by poor performance for many years and was bailed out during the financial crisis by the German government. So it's not an obvious situation as to why anyone would want to buy the bank, or indeed, whether a deal will happen. But the fact that Commerzbank has hired advisers is extremely interesting.
And joining us to discuss the latest developments there is Olaf Storbeck, our new FT correspondent in Frankfurt. Olaf, hello. Good story today. I see that it's moved the markets. Commerzbank shares are up over 3%, I think, on the news of them hiring advisors. Can you just tell us a bit about the timing of this move and whether you think, given the political situation with the recent election, that things are heading towards a potential deal? Are things hotting up over there?
Well, things are surely-- well, I'm not sure if I would call it hotting up, but warming up, that's for sure. I think given the election and the fact that Germany doesn't have a new coalition and only has a kind of caretaker government at the moment, there won't be a deal in the coming months, and the coalition talks will drag on probably at least until Christmas. And before that, nothing will happen in Berlin. And with a 15.6% stake, the German government is basically the key player in this whole thing. As long as they don't make up their mind, nothing will happen.
And the finance ministry has made clear they are not feeling the time pressure. They are not rushing to a deal. And they also are keen on getting a good deal for the taxpayer. And Commerz has been one of the best performing German stocks over the last 12 months. But it's still at EU11.40 or EU11.80. It's still less than half of what the government paid per share when it bailed out the bank in 29.
And politically, do you think that a foreign takeover of Germany's second biggest listed lender is possible? Do you think there would be political resistance to that? Because there's been rumours of interest from BNP Paribas and Societe Generale in France, as well as from UniCredit, Italy's biggest bank, which has a sizable presence in Germany as well. So what do you think about the political potential obstacles here?
Yes, it depends probably a bit on the country where the bidder is coming from. So there were some reports that Berlin-- by [GERMAN], the weekly magazine that Berlin was kind of quite in favour of a deal with BNP Paribas. A French buyer would be probably politically more palatable and more digestible for Germany than an Italian bidder, mainly for the reason that eventually, a banks strength, even in today's banking union in the EU, is eventually determined by the strength of sovereign that hosts it. And given the budgetary issues in the high debt of Italy and also the political instability in Italy, Berlin would probably be much more reluctant to get the most important lender of the German Mittelstand into Italian hands basically.
And finally, Olaf, what about the potential for further domestic consolidation in Germany? Because I seem to remember last year that Deutsche Bank, the country's biggest listed lender, and Commerzbank held abortive talks of some kind about a potential merger there. Is that potential deal completely off the table? Or could that resurface at some point?
I don't think a merger of Deutsche and Commerz is completely off the table. It is a matter of time. Deutsche definitely need a couple of more years at least to sort out its own issues. And once they have done this, and if they are able to do this successfully, it's probably the most straightforward option because the synergy potential in retail banking, which is not very profitable and has been facing really tight competition in Germany for decades due to the network of local savings banks and cooperative banks is probably the best way to get to one really strong German lender.
And also, a cross-border merger, either with BNP or with UniCredit, would also be a bit of a problem for Deutsche Bank. And one other political angle would be the question, would Berlin really be willing to basically weaken Deutsche Bank? And one source I talked to said, well, if they approve a merger with UniCredit or BNP or somebody from abroad, a big bank from abroad, it would basically be an admission that Deutsche is really beyond repair and would weaken Deutsche Bank significantly. And it's questionable if Berlin would really be willing to do this.
Yes, so it's a question of time before Deutsche gets its act together and is strong enough to do a deal. Maybe that's why the foreign bidders are looking at a possible deal now, while Deutsche is still too weak to go ahead with such a deal. So interesting situation to watch, Olaf. Thank you very much for joining us and talking to us. And we'll follow that very closely, I'm sure.
And for our final segment, we're going over to New York to hear Ben McClannahan, our US banking editor, interview Jack Kokko, chief executive of AlphaSense, a company using artificial intelligence to change the way professional research is done.
Jack Kokko, thank you very much for joining us. Let's talk quickly about AlphaSense, what it is, what you do, and how you're transforming lives of analysts around the world.
Good, well, AlphaSense, you can think of us as a Google for research professionals, whether it's analysts or portfolio managers at hedge funds, mutual funds, investment banks, and then business professionals in corporations. And what people use AlphaSense for is finding information that used to be extremely hard to locate in corporate filings, equity research, news, company presentations, all this content, tens of millions of documents that are out there on public companies, as well as private. As an analyst I was printing out big piles of paper on my desk and flipping pages--
You were at Morgan Stanley.
That's right. It's a while ago. But I still remember all those long nights and weekends manually looking for information. And we wanted to build a lot of automation on top of that, just leverage AI and cloud computing, machine learning, to help automate some of those grunt tasks that are keeping analysts busy and allowing them to focus on connecting the dots.
Well, talking to any analyst these days, or any head of investment research in the US, they're all terrified about the impact of MiFID, which is coming down the pike very rapidly. MiFID, of course, is an EU directive designed to provide more transparency into the pricing of investment research. To what extent will it affect the way you go about your business?
Well, we are certainly hearing some of those doomsday concerns and predictions and also some more optimistic ones. And really, it depends on who you talk to. But what we are seeing is really a big shake-down happening. That's one thing that's certain. And there's going to be a lot of negotiations still happening between buy-side and sell-side participants.
So who's shaking who down in this scenario?
Well, it's hard to tell. But I could imagine a lot of buy-side firms trying to see if this is an opportunity to reduce their spending, or at least target their spending on where they believe they're getting value. And where we come in is we've seen that there's really a big gap in the data that people have at their hands to really be able to make a smarter data-driven decision of, among the sell-side firms, who is providing high value research for this biotech theme or that energy team on a buy-side firm's roster to decide who deserves the dollars after this reshuffle happens.
Yeah. How do you go about beginning the conversation? How do you put a price on research?
Well, one good way to do that is to try to determine where, really, the quality of research lies. There's a huge volume of research being published, tens of thousands of reports every day. And a lot of it is-- we've got these couple of two-page reports that go out after every earnings announcement and every little update by the company that pretty much repeats what the company said. And then you've got, at the other end, really thoughtful, deep pieces, thematic analysis on cross-sector trends that are affecting industries and companies that are really delivering a lot of value.
And what we're trying to do is follow and help the buy-side firm analyst understand where they really got value. What reports did they spend two minutes, two seconds on, or 20 minutes on? And where did they actually find really valuable insights that they highlighted, annotated, or perhaps even extracted data and forecasts into Excel, and doing their analysis based on the report? There's a huge difference between those endpoints. And that's what we're trying to help buy-side firms to determine, as well as sell-side.
And I think that's hopefully going to help the whole industry, from our perspective, get to a better, a more efficient outcome here, where based on better data, you determine who is providing best value here and there, and then allocating the research dollars accordingly.
What does your analyst suggest at the moment? Is there a vast amount of research that is just never read, or just briefly clicked on and then ignored?
There's absolutely a vast amount of research that is just briefly clicked on and not read. And then there's a smaller proportion, but still a very significant amount of research, that is getting deep readership. In the past, nobody has known which is which, and which reports are just clicked on versus read and analysed more deeply. It's been just impossible to do, when a lot of research went out in the broad email distribution lists, or were just opened up as PDFs, where you could see that report was opened, but you didn't see anything beyond that. So we've tried to go much deeper than that and analyse the actual engagement with reports. So you can determine where you've got value and where you didn't.
Another thing about that I've been noticing in recent years-- and I'm not the only one, of course-- is the sort of slow death of the sell recommendation. I went through the Bloomberg Terminal and looked at it empirically. And the median consensus recommendation has crept up incrementally over the past few years. What does that mean? Does this reflect the overpowering influence of the corporate finance departments, all the money that's made through Roche's and so on? Banks just don't want to jeopardise those relations by having some guy in the corner putting a sell rating on.
There certainly is quite a bit of that going on, where if you're an analyst, you want to have access to companies that you're covering. You want to be perceived as an expert in those companies and their industries. And if you get into a virtual penalty box by having a sell rating on a company, you might have trouble actually getting those insights. So there's definitely a challenge there.
And you're absolutely right. If you look at the statistics, they're just-- even 10, 15 years ago, were more sell ratings, relatively speaking. And people expected that once you separate-- put a Chinese wall between banking and research that you'd have more sell ratings and less buy ratings. But the end result really has been the opposite.
But I think maybe you shouldn't care so much about that, and look at where is really the value on the inside within the report? Can you glean something from the language that tells you what the analyst really thinks about where the company is going and what their strengths are, what their risks are?
So you need some kind of tool like AlphaSense to help you sift through that.
Well, certainly, we do try to help there. And if you start from the traditional model of where you receive research by email, and you read those reports that you happen to notice, or you see a headline that you happen to like, that's one way to consume research. The other one is, perhaps to start with, hey, I'm looking at a theme that I want to understand, or I need to quickly get up to speed on this company. Let me find the most relevant reports to what their growth plans are in China, for example, and finding the most relevant research across 1,000 providers it's not an easy task. But that's where technology comes in and certainly can help.
Jack Kokko, thanks so much for joining me.
That's it for this week. All that's left to do is think Caroline, Olaf, and Ben for their contributions, and to thank you for listening. Remember, you can keep up-to-date with all the latest banking stories at ft.com/banking. Banking Weekly was produced by Fiona Simon and Aimee Keane. Until next week, goodbye.