Saturday, 26 March 2016

ITG continues to deceive customers

Despite ITG's wows of recent times, the firm continues to take advantage of customer gullibility.

ITG engages in proprietary trading. ITG markets itself as an agency only business.

After their little incursion with the SEC that cost around $20M for some paltry trading returns, ITG has not been called to account for the $70-$100M in proprietary trading profits they have made over the years despite their agency-only claims.

In fact, the ITG 10-Q filings with the SEC were a little thin on mentions of proprietary trading after their fine. It should come as no surprise ITG were a little sheepish about further prop trading disclosures. Nevertheless, they are now bolder. Late February ITG filed their annual 10K. It reiterated their ongoing proprietary trading function in the inter-listed arb (US listed v CAD listed stocks) on page 35:
"Other revenues increased due to higher principal trading gains on inter-listed arbitrage trading."
Canadian Operations
Year Ended
December 31,
$ in thousands
20152014Change% Change
Commissions and fees
Total revenues
Compensation and employee benefits
Transaction processing
Other expenses
Total expenses
Income before income tax expense

Canadian "Other" revenue, once again, was higher than "Other" revenue for the rest of the planet.

$8M each year for the last couple of years is nothing to be sneezed at. How much of that trade is facilitated by or within their own pool facilities? A former ITG Asia-pac CEO told me that some of it is due to ITG pool trading. This CEO was not a trustworthy source about many things but maybe he was right about the incursions into the client pool?

It's worth remembering some of specifics of the SEC findings that resulted in that fine:
6. While Project Omega was engaging in proprietary trading, including with ITG’s own customers, ITG was simultaneously promoting itself, and POSIT, as an independent “agency-only” broker that did not have conflicts of interest with its customers and that protected the confidentiality of its customers’ trade information.
8. ITG Inc. and AlterNet violated Sections 17(a)(2) and 17(a)(3) of the Securities Act by engaging in a course of business that operated as a fraud and by failing to disclose to ITG customers and POSIT subscribers, among other things, that: (i) ITG was operating a proprietary trading desk while at the same time promoting its brokerage services and POSIT by describing ITG as an independent “agency-only” broker;
13. ITG has historically operated and marketed itself, and has a reputation as, an independent “agency-only” brokerage firm. This designation was meant to convey that the firm did not engage in proprietary trading for its own account.
Even the SEC findings make it seem like ITG only engaged in proprietary trading for a short time:
ITG Launched a Proprietary Trading Desk in Early 2010. 
22. During the period of late 2009 to early 2010, ITG explored initiatives to increase
diversification and revenues for the firm, including launching a proprietary trading operation that would engage in algorithmic high frequency trading. Thereafter, on the recommendation of senior management, Group’s Board of Directors approved a proprietary trading desk that was limited in scope to inform whether ITG should launch a fully-scaled and disclosed proprietary trading operation.
That is clearly not the case. Let's have a look to the Canadian proprietary trading that traded US listed and Canadian listed stocks for well over a decade. Most of the revenue in Canadian "Other" is prop trading from inter-listed arbitrage. Here is the list I scraped from the SEC 10-K and 10-Q filings:

$ in thousands
Y2015 8,295
Y2014 8,066
Y2013 8,193
Y2012 6,020
Y2011 6,282
Y2010 5,572
Y2009 8,450
Y2008 16,512
Y2007 11,042
Y2006 8,800
Y2005 increased from what?
Y2004 ?
Y2003 ?
Y2002 ?
Y2001 ?
Y2000 ?

Total 87,232

Whilst ITG deceived customers with the "Agency only" lie in their marketing, the actual trading has been hidden in plain sight with the following snippets from their SEC filings:

Y2015 Other revenues increased due to higher principal trading gains on inter-listed arbitrage trading.
Y2010 Revenues from principal trading (included in other revenues) were lower in 2010 as the expanded presence of professional trading firms has significantly reduced the spread to be earned and thus limited principal trading opportunities available.
Y2009 Revenues from principal trading (included in other revenues) were down in 2009 compared to 2008. Aside from an unfavorable foreign exchange impact of $0.6 million, the reduction was attributable to several factors including lower market volatility and the expanding presence of high frequency participants (which has narrowed spreads and therefore reduced profitable trading opportunities).
Y2008 Interlisted arbitrage trading revenues improved to $15.9 million compared with $10.9 million in the prior year, benefiting from higher market volatility.
Y2007 Other revenues included $10.9 million from our interlisted arbitrage activities versus $8.8 million in 2006
Y2002 (e) income/loss from positions taken by ITG Canada as customer facilitations (a customary practice in the Canadian marketplace) as well as income from same day Canadian interlisted arbitrage trading.

Some laughed at how inept ITG seemed at proprietary trading with Project Omega not reporting significant profits. North of $70M is not trivial for this lot of proprietary trading.

Disgorgement and a large fine would be painful for ITG.

The many good staff at ITG deserve better treatment by management so they don't continue to deceive their customers and betray their trust.

SEC & IIROC, over to you.

ITG POSIT Finra ATS Tier 1 Statistics
1TG at #14 and approximately half of pre-scandal levels
(click to enlarge)

ATS data is provided via and is copyrighted by FINRA 2016

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