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.

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