The SEC has filed a complaint against the world’s largest inter dealer broker ICAP which dominates trading in US government securities and many other OTC markets. ICAP has settled the charges for $25 million and an undertaking to implement remedial action to be suggested by an independent consultant.
The charges are very serious:
- ICAP displayed thousands of fictitious trades designed to mislead other traders about the true state of the market; and
- ICAP brokers executed thousands of trades to liquidate ICAP’s positions against customer orders in violation of the stated workup protocol.
It is depressing that charges of such seriousness are settled without an admission of guilt. The alleged actions shake the very foundations of market integrity and make one wonder whether OTC markets can be trusted at all.
Around the same time that I was reading this complaint, Rortybomb alerted me to a Bloomberg story of a few months ago about an investigation against Markit. The charges here are of a very different nature but they are disturbing in their own way. It is alleged that Markit agreed to provide price information to a clearinghouse only if the latter agreed to clear only trades that involved a dealer.
The question in my mind now is how badly broken are the OTC markets. Whenever, people describe the stock exchanges as casinos, my response is that even if many of the participants are only gambling, the stock exchange still performs the socially useful purpose of price discovery. OTC markets that do not provide transparent price discovery do not perform this function and are much closer to pure casinos. Those that distort the price discovery are worse than casinos.