By Daniel Kruger
Some of the largest bond trading firms on Wall Street boosted profits by colluding to set prices at auctions of government debt, according to an amended complaint to a lawsuit filed by a group of investors.
The new complaint, dated Thursday and listing multiple pension funds among the plaintiffs, says some of the dealers helped protect the profitability of their trading operations by impeding the development of trading platforms that would have improved the investors' access to larger pools of buyers and sellers of the debt.
The complaint, filed in the U.S. District Court for the Southern District of New York, amends a 2015 lawsuit that claimed bond dealers -- including Bank of America Corp., Citigroup and J.P. Morgan Chase & Co. -- were manipulating government bond auctions to boost profits. Spokesmen for the banks and dealers named in the suit declined to comment Thursday.
Any action that raises costs for investors at U.S. government bond auctions would lower their returns, the filing said. The amended complaint was first reported by the New York Post.
While the $14 trillion market for U.S. government bonds is widely considered by investors to be the deepest and most liquid in the world, the suit claims that dealers maintained a relatively transparent and anonymous trading system for themselves, while forcing investors to place buy and sell orders through the investment banks and disclosing their identities to the dealers.
Bond dealers threatened to boycott trading platforms overseen by eSpeed and BrokerTec, where the dealers executed a significant amount of trades, to force the trading platforms to exclude investment firms such as Pacific Investment Management Co., the complaint said.
This boycott was intend to restrict investors to the less efficient and transparent trading systems, which had the effect of raised trading costs for investors and hindering the market's evolution, the filing said. Had the banks allowed investors to trade freely, bond trading might have evolved in the direction of an open exchange where any kind of firm could have traded with any other, as occurs in the stock market, the complaint said.
The original complaint alleged that bond dealers were manipulating the Treasury bond auctions by sharing information about client orders in chat rooms. By sharing information about client orders, the investment banks could submit their own bids to buy securities at the lowest price possible.
Bond firms would also be able to use client order information to gauge how the securities would trade after the auction, and would be able to adjust their own trading accordingly, plaintiffs said.
The defendants include Bank of America Corp., Barclays PLC, BNP Paribas SA, Credit Suisse Group AG, Citigroup Inc., Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Morgan Stanley, Royal Bank of Scotland Group PLC, UBS Group AG and Tradeweb Markets LLC.
"They acted as a cartel to block any development of the market" toward more open trading and transparent pricing, said Dan Brockett, an attorney with Quinn Emanuel Urquhart & Sullivan, LLP who is representing the plaintiffs.