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April 30, 2004

Deutsche Bank Fined for Program Trading Violations

By Peter Chapman

Program trading violations are hurting Deutsche Bank in the U.K.

The big trading house was fined the equivalent of $350,000 by England's Financial Services Authority for trading ahead of a customer's large basket trade. The violation occurred two years ago at Deutsche subsidiary Morgan Grenfell.

Grenfell's program desk, after receiving a request to bid on a 55-stock package, traded in seven of the stocks before it was awarded the trade. The Deutsche traders correctly guessed the customer was a buyer of the seven names and took positions accordingly. Their actions pushed the prices of the stocks up, resulting in a higher all-in cost for the customer.

"By pre-hedging the program trade, Morgan Grenfell ultimately disadvantaged its customer, a fund manager, in the price they paid," said Andrew Proctor, FSA's director of enforcement. The regulator decided Grenfell should have informed its customer it would trade the stocks for its own account despite not knowing the outcome of the bidding contest.

Grenfell ultimately beat out two other houses for the GBP65 million ($120 million) trade with the undisclosed money manager. Approximately twenty minutes elapsed between the time Grenfell was first contacted by the institution and the time the price was set. During this period, the broker bought shares of the stock for its own account.

According to Deutsche Bank, it has since compensated the customer for the overpayment and now informs all customers of its program trading practices.