How to serve Customers

Interesting story in last week’s WSJ:

Bank of New York Mellon Corp. has been fighting accusations that it took advantage of clients while trading currencies… BNY Mellon priced 58% of the currency trades within the 10% of each day’s trading range that was least favorable to the fund, the analysis shows. As a result, the trades cost the pension fund, the Los Angeles County Employees Retirement Association, $4.5 million more than if the average trade occurred at the middle of the trading range for each day, the analysis showed.

A BNY Mellon spokesman confirmed the accuracy of the data and… said there was nothing improper about the practice. It said clients like the Los Angeles pension fund knew—or “should have known—that the bank doesn’t act in their interests when pricing the trades.”

How to Serve (Wall St) Clients

Less sophisticated clients of Wall Street firms such as BNY Mellon, Goldman or Morgan should know that there is a standard procedure for dealing with them, reminiscent of a famous Twilight Zone episode. Aliens invite humans to visit and have their hospitality pre-planned in a book that a scholar has tentatively translated as “How to Serve Man.” [Spoiler] Warm feelings turn to horror when the scholar figures out that the book is actually a cookbook! Similarly Wall Street firms have standard rules of “How to serve Customers.”

Best pricing is for large trades with sophisticated clients who check prices with multiple firms. Prices get further away from market prices as: (1) clients are less sophisticated, (2) clients are perceived as loyal customers who don’t price check (or as stupid), (3) the client position is known, so traders can guess which side they will trade from, and (4) for smaller trades. Since the municipal clients are less sophisticated, loyal, clear their positions with the bank, and trade in odd lots, they get really bad prices. To quote Animal House – a classic movie about investment bankers in college – when a distraught character sees what happened to his brother’s car, his partners, er-frat brothers say:

You F***ed up: You trusted us!

Next quarter when Goldman again reports that they made money trading every single day of the quarter bear in mind that much of it is not trading in the sense of taking real market risks but instead “Serving Customers” (well done, no juice left).

WSJ article:               

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