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A former bond trader at Bank of America Merrill Lynch has been fined £60,000 for market abuse, the first time the UK financial regulator has taken action over so-called “algo baiting” in fixed income markets.
The Financial Conduct Authority said on Wednesday it was fining Paul Walter for giving misleading impressions for the price and demand for Dutch state loans.
Mr Walter, a 20-year veteran trader who also used to work at UBS, netted a €22,000 profit in July and August 2014 for BofA by taking advantage of algorithmic traders on the BrokerTec electronic trading platform on 12 occasions, the FCA found.
In what amounted to an electronic “pump and dump” scheme, Mr Walter appeared to be a bidder when he was actually a seller on 11 occasions, and on one occasion he did the opposite.
Mr Walter later accepted that his initial explanations for his dealings were inadequate, the regulator said. However, it added that his employer had cleared him following an internal inquiry, while the trader who first raised the complaint described the behaviour as “irritating rather than serious”.
Mr Walter entered a series of minimum bid quotes for fixed income bonds issued by the Dutch State Treasury, which became the best bids on BrokerTec, an electronic trading venue owned by Nex Group.
Algorithms — which only read quotes rather than appreciating context — then responded, pushing up the price of the loans, according to the FCA’s final investigation notice. Mr Walter then cancelled his quote and sold at the higher price.
“Mr Walter was able to manipulate the market in this way because he knew that certain market participants used automated systems,” the FCA said. Rivals were affected because they bought and sold the bonds at worse prices “than they could otherwise have done”.
The regulator acknowledged that Mr Walter did not know this amounted to market abuse, but found that he was negligent in not realising this. Mr Walter’s lawyer was not immediately available to comment. The bank declined to comment. According to the FCA’s register of regulated individuals, he has been inactive since August 2014, just after the events in question.