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Banks Slam Antitrust Suit Over `Stone Age' Stock-Loan Market

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Some of Wall Street’s biggest banks asked a federal judge to throw out an antitrust lawsuit alleging they conspired to keep the U.S. stock-loan market “in the Stone Age” to protect billions of dollars in revenue.

Morgan Stanley, Goldman Sachs Group Inc. and Credit Suisse Group AG are among lenders whose prime brokerages were accused last year of colluding to boycott and ultimately destroy two electronic-trading platforms that tried to make the stock-loan market more transparent. Bank of America Corp., UBS Group AG and JPMorgan Chase & Co. were also sued.

The dispute highlights the rise and fall of the trading platforms AQS and SLX, which saw themselves as a “natural step in the evolution of the stock-loan market,” pension funds in Iowa and California claim in the lawsuit.

But after the platforms were “decimated” by the alleged conspiracy, the banks snapped up their patents and other assets through a joint venture to keep them from ever seeing the light of day, according to the suit.

“The market remains frozen in time, and the prime broker defendants continue to dominate an inefficient and opaque OTC market,” the funds, seeking class-action status, said in the November complaint. “Market observers describe stock lending as a trillion-dollar ‘mother of all dark pools.’”

(Related: Dinallo: Securities Lending Needs Attention)

Securities lending is important to short selling, when an investor borrows securities in order to immediately sell them. Institutional investors with large holdings of stocks profit by lending them out, while borrowers aim to profit by buying the security later at a lower price.

The six banks get a combined $9 billion a year from matching stock lenders to borrowers, according to the suit. That figure would plunge if all market participants knew the prices everyone else paid, the funds say.

In a joint filing last week, the banks said the alleged conspiracy is “implausible on its face” and urged U.S. District Judge Katherine Polk Failla in Manhattan to dismiss it. A hearing on the request hasn’t been set.

The investors are conflating stock lending with other products that may be better-suited to anonymous trading, the banks said.

“Rational stock borrowers want to know and cultivate the source of their loans so they can minimize the risk that the loaned shares will be recalled, which would force them to close their position early or scramble to borrow shares” that may be hard to come by, the banks said.

The six banks also say the conspiracy allegation is undermined by the fact that some of the biggest brokerages in the stock-lending market — including Citigroup, Barclays and Deutsche Bank — weren’t sued.

“Plaintiffs never explain how only six prime brokers could block the emergence of a stock-lending exchange if broad demand for it existed, nor do they allege that these prime brokers acted any differently than the many non-defendant prime brokers,” they said.

“We’ll be responding to their motion in due course; we don’t think it has any merit,” Daniel Brockett, the funds’ attorney, said in a phone call.

The plaintiffs claim to have plenty of evidence of collusion, including electronic chats, text messages, recorded phone calls and emails, according to the suit. The funds also describe how the banks allegedly sought to prevent other financial institutions and industry players from working with the platforms.

For example, the funds claim in their complaint that Bank of New York Mellon Corp. abruptly withdrew a $50 million line of credit for AQS after Goldman Sachs threatened the company “with a complete loss of further stock loan business.”

Jennifer Hendricks Sullivan, a spokeswoman for BNY Mellon, which isn’t involved in the litigation, declined to comment on the claim.

QS Holdco Inc., the successor to Quadriserv which developed AQS, sued the banks separately this week, accusing them of running the platform into the ground. QS Holdco says Morgan Stanley and Goldman Sachs were at the center of the conspiracy.

The complaint details a series of private meetings and dinners allegedly held in New York between executives at Goldman Sachs and Morgan Stanley in late 2015 to discuss the platforms. They struck an “explicit agreement” that was later joined by the other banks to “bury” AQS, just as they had done by that point with SLX, according to the complaint.

Jackie Zupsic, a spokeswoman for the QS Holdco, said the company sued after seeing details emerge in public filings in the earlier case.

“It has become increasingly clear that some of the nation’s largest investment banks coordinated their actions to ensure that public investors were deprived of fair access, transparency and the efficiencies of AQS’s centralized securities-lending market,” she said in an email.

Morgan Stanley spokesman Mark Lake and Tiffany Galvin, a spokeswoman at Goldman Sachs, both declined to comment.

The case is Iowa Public Employees Retirement System v. Bank of America Corp., 17-cv-6221, U.S. District Court, Southern District of New York (Manhattan).


The National Association of Insurance Commissioners has posted a collection of documents discussing insurers’ involvement in the securities lending market here.

— Read N.Y. Eyes Securities Lending Collateral on ThinkAdvisor.

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