Big Banks Face Lawsuit Over Smaller Corporate Bond Trades

(Bloomberg) -- A cavalcade of big banks including Bank of America Corp., Credit Suisse Group AG and Goldman Sachs Group Inc. was sued for conspiring to suppress corporate-bond trades of less than $1 million in par value at the expense of small investors.

The antitrust lawsuit alleges that the banks worked together to restrain trading of “odd lots” of corporate bonds, smaller trades made mainly by individuals. Barclays Plc, Citigroup Inc., Deutsche Bank AG, JPMorgan Chase & Co., Morgan Stanley, Natwest Markets Securities Inc. and Wells Fargo & Co. were also named.

“No reasonable economic justification explains the magnitude of the pricing disparity between odd-lot and round-lot trades,” according to the suit, filed Tuesday in federal court in Manhattan by an individual investor. The suit seeks unspecified damages and to force the banks to stop the alleged conspiracy.

The banks declined to comment on the suit or didn’t immediately respond.

While odd lots make up the “vast majority” of corporate bond trades by volume, the banks work together to keep spreads between the ask and bid prices wide, colluding to stifle competition, according to the suit. That forces investors to pay “substantially higher” trading costs than those who transact in larger, round lot trades -- mostly institutional investors, the plaintiff says.

The investor, who seeks to represent others as a class, contends that “a truly competitive market” would result in narrower bid-ask spreads.

Investors have tried for years, mostly without success, to break the hold that large banks have on the corporate bond market. While more trading than ever is done electronically, the big players are still vital to lining up private deals for those who want to trade more than $5 million at a time. Efforts to automate more bond trading and allow new entrants are underway, yet the big dealers still play a huge role in new ways of buying bonds -- like portfolio trading, in which hundreds of securities can be purchased at once -- signaling they aren’t going anywhere soon.

Now, with the market moving at warp speed amid the economic crisis created by the pandemic, investors trying to take advantage of new distressed opportunities or unload debt quickly are more eager than ever to buy and sell securities the old-fashioned way, where most of the debt is still traded, rather than on electronic platforms. Bond traders at firms including Citi and JPMorgan had some of their best quarters ever, a bright spot during a time when banks are expecting surging loan losses.

The case is Isabel Litovich v. Bank of America Corp., 20-cv-3154, U.S. District Court, Southern District of New York (Manhattan).

©2020 Bloomberg L.P.

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