There is not much, at this point, that you could call predictable about the scandal engulfing Japan’s giant domestic brokerage, SMBC Nikko — a business that the authorities have bumped down from slavering wolf to sacrificial lamb in the space of a few short weeks.
Two executive officers have been arrested, five staff are behind bars and the tally of those named by prosecutors in connection with market manipulation allegations continues to climb. Extrapolate only a bit about how common the SMBC Nikko block trading activities under scrutiny may have been, and the whole Japanese equity scene is, to some extent, in the dock.
What can be forecast with some confidence is Japan’s mortified pearl-clutching once the trial process introduces the country to the everyday badinage of a Tokyo equity trading floor.
One of the many problems for SMBC Nikko, which has been under a combination of no-holds-barred regulatory and criminal investigation for a year now, is that the prosecutors appear to be sitting on an unusually deep archive of material.
This is stuff that will probably, with minimal effort from the prosecuting lawyers and irrespective of whether it actually proves any guilt, sound damning when read aloud in court. According to people close to the situation, the prosecutors not only have a number of loosely-worded emails that flew between traders and their bosses, but, as a consequence of the measures taken by the bank to continue trading during the depths of the pandemic (a permanently open phone-line between offices), rare hours of audio from the floor itself.
Nobody, in any industry, can relish having their internal communications laid bare. Even in relatively gentle trades, professional cant has a callous, transactional edge that inevitably sounds terrible out of context. Trader chat, which can take a piratical tone, travels particularly poorly beyond its habitat, especially in the hands of those aiming to show that it’s always the little guy getting hurt.
The language is infused with adrenaline, partly because it is a game ruled by greed and partly because the nature of the environment requires, in the minds of many participants, a certain bravado.
According to the accounts of former SMBC Nikko staff, the material now in the hands of prosecutors was nothing out of the ordinary — just what you would expect from what was, pre-imbroglio, a highly profitable trading floor confident that it had earned its swagger.
At the heart of the criminal charges against SMBC Nikko and the individuals arrested is the allegation that the bank’s proprietary trading desk was strategically buying-up the stocks that were being sold by corporate clients as large, off-market block trades. Prosecutors allege that these price-boosting trades were undertaken to prevent the lucrative block trade deals from collapsing if the price fell too far. Four of the five arrested so far maintain their innocence and, according to legal experts, are likely to argue that simply buying stock in the open market does not cross the line into price fixing.
That will be for lawyers to argue and the outcome will have significant implications for the future of block trading in Japan — especially by brokerages such as SMBC Nikko, attached to one of the megabanks and with deep ties to Japanese corporates. The risk for the defendants in the court of public opinion, though, is that even the most rigorously rules-compliant dealing room — with their perma-thrum of one-upmanship — can easily sound to outside ears like a den of conspirators.
The inevitable public shock may be exactly what both prosecutors and regulators are hoping for. The equity dealing floor of SMBC Nikko is described by those who still populate it as a place in mourning. Clients have cut relationships; friends and bosses are behind bars; internal pep talks from senior management will continue to ring hollow until the arrests actually stop.
This state of affairs is no accident. On several levels, the authorities appear bent on making an example of this particular domestic brokerage, possibly because they suspect this was happening elsewhere and this may represent, in their minds, the simplest way of solving a wider problem. By laying charges against a broad range of SMBC Nikko bankers, from board members to comparatively junior staff, both the financial regulator and prosecutors are implying a systemic wrong and pre-empting any “rotten apples” excuses from the bank as a whole.
There is a longer game being played here. The prosecutors appear to have valuable cards to play and may rightly be gauging the public appetite for titillating disclosures of unguarded trader chatter.
