Six firms conspired to boycott upstart trading platform and ‘starve it of liquidity,’ according to suit
A newly filed lawsuit against six major investment banks contends they worked together to prevent a startup company from competing in the vast and lucrative stock-lending market.
The complaint, filed Tuesday in a New York federal court, follows a suit brought last summer against the same institutions by three pension funds who accused the banks of conspiring to keep their stranglehold on the roughly $1 trillion market.
The litigation brings increased scrutiny on the stock-loan business, an opaque, over-the-counter market that is a crucial but behind-the-scenes cog in Wall Street’s trading machinery.
At issue are stock-lending transactions, in which pension funds, insurance companies and other investors lend their shares to brokerage firms whose customers, such as hedge funds, borrow stock to offset other positions or make bets against companies in trades known as short sales. Asset managers receive a fee for the stock they lend depending on borrower interest in it.
The suit was filed by QS Holdings, the parent of Quadriserv, which was formed in 2001 and built an electronic trading platform. Called AQS, the platform gave stock-loan participants access to real-time prices on trades that reflected actual bids and offers.
Transactions on AQS were executed anonymously and centrally settled; the system was registered with the Financial Industry Regulatory Authority and the Securities and Exchange Commission. But it never gained traction and was sold in a distressed sale in 2016.
Representatives of the six firms— Bank of America , Credit Suisse , Goldman Sachs , JPMorgan Chase , Morgan Stanley and UBS Group—declined to comment. On Jan. 26, the six firms filed a motion to dismiss the lawsuit filed last summer by the pension funds. In that filing, the firms said the allegations were meritless, noting that “none of the plaintiffs’ allegations identified ‘direct evidence’ of conspiracy.”
In the stock-loan business, investors borrowing shares from brokerage firms also pay, sometimes steeply, for the service. When many traders want to borrow a company’s shares, its stock is known as “hard-to-borrow” and fees associated with the transaction are far higher.
Firms conspired to boycott upstart trading platform and ‘starve it of liquidity,’ according to suit
The middlemen in these trades often are Goldman, J.P. Morgan and Morgan Stanley. They make trades in an over-the-counter market where prices are typically given privately to customers. It thus is difficult for them to determine whether they are getting appropriate prices.
The middlemen typically keep most of the fees collected on the most lucrative trades, and critics say that amount would be far lower if borrowers and lenders met in a centralized market where pricing was transparent, like the AQS.
In 2016, the AQS suit said, the six banks received over 65% of the $9.15 billion generated in stock-lending revenue across the industry.
The suit said the AQS system initially received support from some hedge-fund and venture-capital firms and a European stock exchange.
But in 2009, AQS alleged that brokers, fearing their profits would be pinched, conspired to “boycott AQS and starve it of liquidity,” the suit said, which added that Goldman and Morgan Stanley had the most to lose because together they controlled 45% of the business in such prime-brokerage services.
Top officials in the stock-lending units of the six investment banks collectively refused to participate on the AQS platform, keeping their trades and data off the new electronic mark, the suit alleges. Hedge funds and asset managers who wanted to use the platform then had less access to stock-lending liquidity.
The suit also said that hedge funds using AQS received threats from the investment banks that they wouldn’t assist them in raising capital if the funds continued to trade on the platform. Citing contemporaneous conversations among the bank officials, the suit said they characterized their firms as “the five families” of stock lending, a reference to the organized-crime consortium that once dominated New York City.
Amid mounting losses, QS Holding sold AQS in August 2016 to Equilend, a consortium whose owners included the investment banks, for less than $5 million, the suit said. “To this day, no lender or borrower can trade and centrally clear stock loans without the significant involvement and tacit approval of the prime broker defendants,” the suit said.