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City dealing rooms are making a mint from the Bank of England's £125 billion quantitative easing programme, Tullett Prebon boss Terry Smith suggested today.
Wall Street is accused of reaping outsized profits from trading with the US Federal Reserve, and the City may be doing something similar with the Bank.
The Fed is buying more bonds than any other party and flags its intentions before trading. This allows dealers to sell the bonds at an inflated price.
“You've got the US Treasury declaring exactly what it is going to do and when,” said Smith. “It's like selling a second-hand car and telling the guy exactly how little you will take for it. It is handing a free lunch to Wall Street.”
Asked if the same was happening to the Bank of England as it buys unprecedented amounts of bonds as part of its QE deal, Smith said: “It's pretty similar.”
The Bank will declare on Thursday whether it intends to step up the QE plan, “printing money”, in simple terms. If it does expand the scheme to a mooted £150 billion, that could be more good news for City traders.
Dealing in government bonds is only 10% of Tullett's revenues, which today unveiled strong half-year results. Profits rose 19% to £100 million, on revenue which jumped 11% to £518 million. The results handily beat City expectations, partly thanks to cost-cutting. The shares added 18p to 377¾p.
Smith reckons that as long as markets remain volatile, interdealer brokers such as Tullett will thrive.
“The world's financial markets remain unsettled and volatility in interest-rate structures, currency parities and credit spreads seems likely to persist,” he said.
Large banks and other institutions use Tullett and its rivals such as Icap to hedge against other positions they hold using derivatives.
There has been some talk that such over-the-counter trading helped cause the financial crisis and should become more transparent.
“People have a knee-jerk reaction to crises. A lot of people run around with their hair on fire prescribing things. There is no evidence that credit derivatives caused this crisis,” said Smith. He added: “Sometimes complete transparency is the enemy of a clear market,” citing government bond trading as an example of where one party may lose out because their intentions are known.
Tullett is paying an interim dividend of 5p a share, up from 4.75p last time. Smith got paid £4.5 million this year and has a £5 million share incentive scheme on top of that.
