Tricks of the traders

What's the rarest commodity on the stockmarket? Honesty. A former broker exposes the corruption, greed and insider dealing endemic in the City

* The Guardian,
* Saturday May 3 2008
* Article history

This article appeared in the Guardian on Saturday May 03 2008 on p34 of the Features & comment section. It was last updated at 00:11 on May 03 2008.

It was a typical day of coke hangovers and questionable ethics. Half past 10 in the morning and I was slumped at my desk, grey Hermès tie hanging despondently from my neck like a hangman's noose. I was struggling to breathe. Steve on the other side of the room overruled my pleas for the air conditioning to be switched on - another reason to hate him and his crew on the old-boy side of the desk.

We sat in long, straight rows in the trading room, like slaves chained in the hold of a Roman galley. Our chains were gilded ones, granted, but they shackled us all the same: from 7 till 4.30, five days a week, we barely left our desks. There were eight screens shared between each pair of traders, the monitors stacked on top of one another in a tight semicircle. Hundreds of stocks flashed their rise and fall across the screens, with the Reuters newsbar spewing out company announcements like a Gatling gun all day. Our eyes were trained to follow every flicker. Banks of phone lines were available at the push of a button, two handsets per man - one for the right hand, one for the left - thoughtfully built of toughened plastic to withstand the phone-to-wall smashing that took place whenever a deal fell through. This was our world - and the flashing numbers scrolling past on the liquid crystal screens could make or break us, turning us from heroes to villains and back again in the blink of an eye. My boss Tony's rasping voice bored its way relentlessly into my ear from the minute I sat down to the minute I bolted at the closing bell. Today was no exception, try as I might to ignore him.

"Everyone's saying there's a bid for Company A," he babbled. Yeah, Tone, but you're like the boy who cried wolf - every five minutes he'd get a text, or a call, or even just a vision, about this or that company being the subject of a takeover bid. Nine times out of 10 it was complete nonsense - but in this game nonsense wins prizes. Because if you buy early, and the story reaches enough people, the stock's going to fly - truth or no truth - and you've sold yours well before the company issues a denial announcement.

Hard facts meant little in a world ruled by paranoia and fear - paranoia that everyone's trying to do you out of your profit, fear that you're going to miss out on even bigger winnings if you don't follow the herd. People like Tony acted as both instigator and reactor in this game - some days he set the ball rolling when he felt like ramping a stock; on others he'd be just one more adding to the circle of Chinese whispers that blew round the City like wind through rushes.

So, for all I doubted this latest rumour, I agreed to keep my eye on the screens, in case anything did happen. We worked well like that - he had all the sources, I did the grunt work. He'd large it up at Fabric, Hakkasan or wherever the denizens of the trading scene hung out, while I, faithful lapdog, got to be his Sets boy by day. (Sets is the computerised trading floor used by the London Stock Exchange.) If you're quicker than the other 10,000 traders out there, you can read an announcement, make up your mind in a flash, and buy or sell before the others have even clocked something's going on.

That's the way it would go. I'd seen it happen. Bang - Company B announces, it's received an approach. Your fingers know what they're doing before your eyes have caught up. Buy ... 100,000 ... limit, say, £7.65. Got them - now you're off and running.

Ten seconds later and the little beauties are changing hands at 835, no ... 840, 850 ... 860 now ... you're yelping like a puppy and, ignoring everyone around you, selling back the 100,000 you've just bought for maybe 862. The brokers erupt like Vesuvius. Right there they're sitting on nearly a hundred grand profit.

Their hearts are racing. They get the lift down, then run out on to the street for a smoke.

"Keep it down, keep it down, someone'll hear..." And this is the beauty of the operation. With the team leader on board level at the firm, yet still a dodgy little bastard at heart, a three-man team has the means to pull this type of heist all day, every day. The rules say you must specify which client you're dealing for before you trade - so, in theory, the Company B winnings would already have a home. But for many a broker, the rules are slightly different. You trade first, ask questions later. If it all goes pear-shaped, if the stock falls instead of rises, there's always a pension fund or discretionary account that can take the hit for 50 grand or so. But if, with Company B, say, you hit the jackpot, then screw the clients, this one's for the boys.

Everyone had dummy punters, friends or relatives who let you wash any winners through their account. So in the case of Company B and a three-man team, this would mean just shy of 100 grand split three ways: more than £30,000 - less 40% capital gains tax - and that would be nearly 20 grand per man.

I had a setup with my mate M that we'd go 40-60 on each deal - but I had to see it in cash the same day. And, of course, I took the 60. His account was entirely governed by me. I had tacit approval to move as much stock through it as I liked, so long as he was always up at the end of the week. And that's what I did. The compliance department (company employees who were answerable to the Financial Services Authority [FSA] which was supposed to check that all the deals were above board) barely batted an eyelid at his account's stellar performance, assuming he was a proper punter who knew the ropes - plus I tossed in a few losing trades every now and then to throw them off the scent. We needed to maintain only around 20 grand in the account to keep it operational. I traded off margin (that is, we had only a small percentage of what we were spending in the account); so long as the trade was bought and sold during the same three-day period, no cash would ever need to be laid out on the deal. In this way, I could take six-figure positions in his name with ease. Whatever smash and grab I'd pulled off would soon be marked down on a dealing ticket with M's name and number at the top; I passed it to the boys in the back office who put the trade into the system, thus ensuring the cash made its way to its (not so) rightful home. That meant, in a few hours' time, I could be picking up several grand in folding bills somewhere near Bond Street.

Behind the headline-grabbing stories of rogue traders losing billions, the more mundane, day-to-day world of high finance is as wild and unregulated today as it ever has been. Brown envelopes stuffed with £50 notes change hands every lunchtime in bars across the City; drugs wreak havoc with traders' judgments as they stake fortunes of their firms' money on the markets; and greed trumps all else in the stampede to get rich or die trying.

"When in Rome, build a fucking aqueduct." Those words, bellowed at me by my biggest client as he lay sprawled in the bar, proved to be the most telling advice I ever got in the City. Everybody's doing it, why shouldn't we? There's no point pretending - no one is in this game to make the world a better place. It's all about the money. From the bottom up, the only thing that matters is feathering your own nest, regardless of who gets shafted along the way or how compromised your morals become in the process.

I played the game for the best part of a decade and saw first-hand what lies beneath the veneer of London's financial district. For all the stock exchange is presented as a transparent, trustworthy great British institution, the truth is that everywhere corruption drips like honey. For all the talk of FSA controls, those working there know they can get away with abuses with barely a slap on the wrist - and so they do, day after day, year after year.

The way things worked in our firm, the well-dressed, well-connected north London boys were groomed to become the next generation of brokers, skilled at flattering the clients. At the same time, the Essex boys who joined the profession ended up as dealers, equally obsequious, penetrating the inner circle of the market to get the best prices buying or selling shares. The relationship between brokers and dealers was a symbiotic one, though below the surface there was little love lost between the two sides. The brokers looked down on the uncouth mannerisms of the barrow-boy dealers, who in turn mocked the slickness of their cufflink-sporting counterparts. For my part, I yearned to be a rough and ready dealer, out getting hammered with the other market-makers every lunchtime, but - in the caste system that was the stockmarket - I was doomed to remain on the broking side of the divide.

It was 1997 - I was 19, suited and booted and fresh out of school. The dotcom boom was in full flow and the firm's corporate finance department was inundated with new companies wanting to ride the internet wave and list on the market. All this extra work meant many more hands were needed on deck in the junior department. A few new faces were brought in and I - by virtue of being the only one who had even the slightest clue how the dealing room operated - was put in charge of our little team. All of us were urged to take the relevant exams as soon as possible, so we could start trading for clients in our own right. I made it my mission to be the first to make the leap from junior to broker and suddenly I was propelled from dogsbody doing menial tasks to the lofty position of partners' assistant.

Paul was my overall boss and tormentor for the entire time I spent working for the partners. He ran the Middle Eastern side of the business and took his role incredibly seriously. I spent all day hunched over my Reuters terminal, watching minutely every move of the FTSE stocks for him.

Back then, not a day went by without yet another minnow doubling in price as the punters piled in. According to one of the partners, the next big thing was going to be Company C. This was a cash shell - a listed company with some funds on its balance sheet, but otherwise no operational business - and our firm's finance department was negotiating a deal to reverse a new internet company into it, which meant the sky was the limit in terms of its future share price. Officially, there were Chinese walls between the finance department and the trading room, which meant the brokers shouldn't have been privy to any of the impending deals being thrashed out upstairs. In practice there was no such thing - and no one batted an eyelid in the compliance department.

None of the brokers would be so brazen as to trade any "house" stocks in their own account, as their personal trades were far more likely than their clients' to be scrutinised, so most people just bought Company C for their favourite clients and took their cut through the commission they charged. Other brokers displayed even more chutzpah, setting up accounts in the names of trusted friends, then washing trades through their accounts and taking their cut of the profits in cash.

As I had no clients of my own, I told a friend's older brother what was going on with the stock - which had risen stratospherically by now from 15p to more than £1. He loaded up, strapped himself in for the ride, and within a couple of weeks was selling them back to the market at more than £4 apiece. He sorted me out in the currency I favoured most - vacuum-packed bags of skunk - and we all did nicely out of the experience. Thus began my education in the low-level insider trading endemic in every City firm - whatever the authorities would have you believe.

As one partner explained it to me, "If you've got a son who's a doctor, then he'll give you a free check-up when you need one. If your dad's a lawyer, he'll do your conveyancing for nothing, won't he? So if your best friend's a broker, you'd expect him to toss you free money when it's on offer - that's what we do." That all sounded sweet as far as I was concerned: I was yet to find anything that turned me on more than fast cash and the chance to flash it about.

Our firm was a self-styled boutique brokerage, with a small and exclusive customer base - captains of industry, property tycoons, pop stars and minor celebrities. Many sat on the boards of public companies and were more than happy to brief us about their own shares. No matter to them that they were under obligation not to divulge financial information when their firms were in "closed periods" (the two months before they made public their annual results and trading statements); they used coded signals and texts to get the message out that the time was right to buy or sell their stock, before the public got hold of the information.

The brokers greedily devoured the morsels they were thrown - after all, being in the know is everything in stockmarket circles. If a takeover bid was coming for a certain company, you could guarantee those close to the board would have a quiet 50 grand punt on the stock in the run-up to the event. And when the right people bought, it sent a signal to the partners to fill their own personal accounts with the shares, too, before they passed on the tip to their friends in the market and really got the ball rolling.

The brokers could also rely on their friends at other trading houses to pass on any nuggets that came their way. Our brokerage wasn't considered competition by the market colossuses - if anything, we were akin to the birds that feed themselves cleaning hippos' teeth, and the relationship suited both parties. Many of the top traders and market makers at the major firms had their personal accounts with us. Technically they were obliged to report their dealings to their own compliance officers, but if another brokerage carried out the trades, there was much less scrutiny of whether they'd put their own interests before those of their clients.

They'd call and tell us what to buy in their names, then say, "You should have some of those yourselves; we're about to run the price up." Once everyone was on board, that's exactly what happened. The market is run on a "for us, by us" mentality.

There were financial journalists who were just as deeply in the pockets of the industry and broking figures. If the morning papers carried reports of bid rumours for a stock, you knew that whoever was the source of the whisper had already loaded up on stock for themselves. For the journalists it was a self-fulfilling prophecy - once they'd reported the story, their readers would witness the meteoric rise of the shares during the course of the day. Any trader who tipped off the the city pages' gossip columnists could count on maximum exposure, thus giving their stocks a welcome fillip when the market opened next day.

If the story had legs, the company involved would put out a "response to press speculation" announcement and confirm that they were indeed in bid talks - so the shares would rocket and those already in would be laughing. If the story was false, chances were the price would spike initially as the so-called "mug punters" piled in, giving those who'd bought the day before the chance to offload their stock; and by the time the company denied any bid, the only people left holding the baby were those sucked in by the paper's eager reporting of the rumours.

Either way, journalists played as important a part as anyone in the ramping of share prices, which is why they were treated with such deference by brokers and company executives alike. "Buy on rumour, sell on fact" was an adage to which we all stuck - the real moves in price came long before companies issued official guidance about their activities. And, for all its bluster, the FSA - set up to regulate the industry - never did anything to address the suspicious moves in hundreds of share prices every week.

While insider trading - dealing stocks with the benefit of knowledge not available to the public - is strictly illegal, it is also so rife among City firms as to have become all but institutionalised. Knowledge is power and since, in the world of finance, power is money, it's little wonder that however hard the FSA tries to stamp out the abuse, those who call the shots in the City try even harder to get away with it. As Jonathon Crook of the law firm Eversheds said recently, in the wake of the HBOS scandal (when the bank's share price fell by 20% following carefully planted rumours that it was in trouble), "The effectiveness of the FSA as a prosecutor remains questionable. While it has had some success on relatively straightforward cases, it has yet to prove its mettle on a major matter."

Calls that came through to the dealing room were taped, but mobile phone calls were not; nor were text messages monitored. Chats in local bars and pubs provided equally secure ways to circumvent compliance procedures. These were people who wouldn't steal from the supermarket but thought nothing of the way they robbed the rich to make themselves even richer. Every illegally gotten piece of information was depriving outsiders of the chance to trade the markets on a level playing field. For every penny made illicitly, by definition someone had to lose in return. Spoofing the public into buying shares via newspapers or by spreading rumours was highly questionable, but in a world in which morals are defined by the standards of those around you, who would point the finger?

It was a similar story with drugs and alcohol. When the FSA periodically announced it was mulling plans to perform random drugs tests on traders, many in the industry were privately up in arms, questioning why they should be subject to such draconian measures when doctors and nurses - "who are playing with people's lives" - were not. It didn't occur to them that being in charge of millions of pounds of clients' money was a similarly enormous responsibility.

Part of my unofficial role as assistant to the partners was to pick up their drugs, for which I was tipped in cash as though I were a shoeshine boy outside Moorgate station. Coke was just another way to flash one's wealth, as well as get the same buzz after the market shut that trading provided during the day. For all that everyone loved the moment they closed out a winning position, there was a postcoital depression that is the curse of gamblers of every persuasion. Drugs and drink filled the void. Though doing coke during office hours was generally frowned upon, a hard drinking session over lunch was laughed off by the other brokers, even when it caused people to fall asleep at their desks or be so addled that they hit "buy" instead of "sell" when dealing on the screens. In the City, excess was to be admired and blind eyes were turned to any indiscretions - so long as the guilty party was a financial asset to the firm in the wider scheme of things.

Certain clients even expected such behaviour from their brokers, viewing their antics as proof that they were so good at their job, they were given free rein to behave as they pleased. I routinely had to entertain clients for marathon 12-hour sessions which involved supplying them with whatever drugs they desired on top of £1,000 lunches. Broker-client relationships existed through a prism of false mutual adoration - the broker lavishing praise on the client to curry favour and keep his account, the client doing likewise to ensure the best service, best advice and, most importantly, best off-the-record tips.

The ecosystem worked very nicely for all those on the inside of the Square Mile-sized gentlemen's club that was the City. It wasn't what the FSA had in mind when it periodically promised to clean up the world of finance, but by monitoring the situation from afar, it was never likely to penetrate the opaque sheen that allowed duplicity and double standards to flourish unchecked within broking houses. Occasional censures were handed out, but no one I knew was ever caught for their crimes, and with neither peer pressure to play fair nor intervention from on high, it was no wonder the City continued to adhere only to the law of the jungle.

The basest instincts come to the fore when the name of the game is money and your standing in society is based purely on how much you've made and how fast you've made it. I was as guilty as the next man of adopting this skewed outlook - but it wasn't until I left it all behind me that I realised how deeply I'd been bitten by the lust for lucre. When I was trading millions on behalf of my bosses and clients, I saw nothing amiss about spending £300 on a McQueen sweater or half a grand on a drug-fuelled night out. Cash that could be made in an instant could be spent the same way, and there was always more where the last wad came from - no matter how ill-gotten the gains or how unscrupulous the process of acquiring the next haul.

In the end, I got out because it was clear to me that it was a case of now or never. Spending all day with men in their late 30s who couldn't see past the next deal, the next line of coke or Porsche Carrera set alarm bells ringing in my head - if I didn't want to turn out like them, I had to hang up my trading boots. Much as the casino atmosphere was limitless fast-paced excitement for a boy in his mid-20s, as a long-term lifestyle choice it was too shallow and superficial - it wasn't worth selling my soul.

Trading is as addictive a pastime as any other form of gambling, and as any drug. It becomes a way of life - a way to define yourself, to convince yourself you are the centre of the world and believe that you are abundantly powerful in the grander scheme of things. Hitting a button and effecting a seven-figure transaction is the stuff of fantasy for most people in the real world, but when you've been doing it every day since you were 19, you soon lose your sense of reality and get swept away in the carnival atmosphere.

Sipping a quiet pint in the pub after an adrenaline-packed day riding the market rollercoaster doesn't quite sate the appetite, so heavy drinking, hard drugs and all the other trappings of overindulgence soon become standard fare. But the plight of the trading addicts is masked by their clothes, jewels, cash and "success" - few question their happiness, since they seem to have it all. These aren't junkies huddled under railway arches begging for loose change, but their entrapment is no less acute - quitting is as hard for a trader as it is for a heroin fiend.

I don't say this in an attempt to solicit sympathy for the devil - I've got none myself, and wouldn't expect anyone else to be brimming with compassion for the City traders, either. Instead, thought should be spared for those members of the public whose chances of investing successfully are greatly impaired by the innate corruption of the Square Mile, and the inaction of the authorities who are meant to police the City. Until a crackdown occurs, there'll never be a change in how business is done in the stockexchange - there wasn't throughout my 10 years on the inside and, judging from the tales of friends who are still trading, there hasn't been since I left. The public might feel justice has been done when the likes of Nick Leeson and Jerome Kerviel are caught red-handed - but the truth is that they are just the tip of the iceberg.

· The names of individuals and companies, and some other details have been changed.