“Abusive Trading Strategy 58. During the Relevant Period, Mr Urra undertook an abusive trading strategy, both alone, and in collaboration with Mr Lopez and/or Mr Sheth. The abusive strategy involved placing orders for the purpose of giving the false or misleading impression and/or signal that the Traders wanted to buy or sell a specified number of BTP Futures lots (the “Misleading Orders”), when in fact the Traders did not intend to trade these orders, but instead intended or hoped to facilitate the execution of other genuine orders on the opposite side of the order book (the “Genuine Orders”). Misleading Orders which appeared to increase supply would encourage other market participants who wanted to sell to cross the spread and trade with existing buy orders in anticipation of the market moving lower (and vice versa for Misleading Orders which appeared to increase demand and might prompt the market to move higher). … 61. That the trading carried out by Mr Urra (alone or in collaboration with Mr Sheth and/or Mr Lopez) gave or was likely to give a false or misleading impression and/or signal as to the supply of, demand for, or price of, BTP Futures, and was therefore abusive, is to be inferred from one or more of the following features: 61.1 The Misleading Orders were orders of BTP Futures showing 200 lots or more on the Exchange (“Large Orders”). Large Orders were rarely placed on the Exchange (see further paragraph 63.1 below) and were large compared to the Genuine Orders. They therefore gave or were likely to give an impression and/or signal of significant supply/demand to other market participants on the opposite side of the order book from the Genuine Orders. 61.2 None of the Misleading Orders were placed as Iceberg Orders, whereas some of the Genuine Orders (despite typically being significantly smaller) were placed as Iceberg Orders. By showing the full size of the Misleading Orders, this gave or was likely to give an impression and/or signal of significant supply/demand to other market participants on the opposite side of the order book from the Genuine Orders. 61.3 The vast majority of Misleading Orders were placed near enough to the Best Bid or Best Offer to be visible to other market participants (and thereby increase the pressure on the order book) but not so close that they were likely to be traded. 61.4 None of the Misleading Orders fully executed, and only 3 partly executed. In those 3 cases, only a very small minority of the order traded (under 10%) before being cancelled. Moreover, in each instance where the Misleading Orders began to trade, they were cancelled under 10 seconds later. By contrast, in each trading instance particularised in Amended Annex I, the Genuine Orders together mostly or fully executed prior to the cancellation of the Misleading Orders; the overall execution rate across the total volume of Genuine Orders before the cancellation of the Misleading Orders was 95%. 61.5 The Misleading Orders always overlapped with at least one Genuine Order on the other side of the book. Save for one instance, the last Misleading Order(s) on the order book in a particular instance were cancelled after the majority of the Genuine Order had filled, on average 5 seconds after. 61.6 The Traders have not matched executed BTP trades or RFQs against the placing of their Misleading Orders in the BTP Futures market. 61.7 The volumes of the Misleading Orders were particularly large sizes, frequently placed in round numbers and/or repeated numbers of lots. Of the 36 Misleading Orders placed by Mr Urra acting individually across 31 instances, for example, 13 were lots of 444, 9 were lots of 450, 5 were lots of 490, and 3 were lots of 400. It is inherently unlikely when placing genuine orders for hedging purposes that there would be so many identical orders, since market-makers will seek to hedge the precise residual risk on their books from time to time. 61.8 The Misleading Orders were not netted off against the Genuine Orders on the other side of the book (for example, if the Genuine Order was to buy 10 lots and the Misleading Order was to sell 500 lots, they could have placed a sell order of 490 lots, but did not do so). It was more costly to trade on both sides than to net off, and in addition there was potential additional risk from movements in the price from failing to net off. 61.9 The volume and repeated pattern of these types of orders over the Relevant Period by all the Traders (alone and in conjunction with one another) indicates a deliberate strategy. 62. In relation to each of the occasions where Mr Urra is averred to have carried out the strategy in collaboration with Mr Lopez and/or Mr Sheth…, it is inferred from the contemporaneous activity of the other Traders in each of the instances specified and the matters pleaded at paragraph 55 above that they were working together to a common strategy. 63. That the Traders’ conduct was abusive is also to be inferred by comparing their behaviour with the trading and order placement of BTP Futures on the Exchange by other market participants during the Relevant Period. The former was markedly different from the latter: 63.1 Large Orders of BTP Futures were rarely placed on the Exchange by other market participants. Including MHI, 47 market participants placed Large Orders during the Relevant Period, accounting for 0.02% of the total number of orders placed on the Exchange during the Relevant Period. 63.2 Despite MHI being a small market player, trading less than 0.43% of the total traded volume of BTP Futures, the Traders placed more Large Orders than any of the other market participants and accounted for 23.24% of the total volume of Large Orders placed across the Relevant Period. However, the Traders rarely executed BTP trades or received client orders in BTPs that they could have wanted to hedge with these Large Orders. 63.3 While … the Traders placed significantly more Large Orders than other market participants, they had much lower execution rates of their Large Orders. The Traders partially or fully executed only 1.5% of their Large Orders, cancelling 98.5% without them having begun to execute (Mr Urra himself executed 0.8% of the total volume of Large Orders that he placed). By comparison, other market participants partially, or fully executed 72.28% of their Large Orders, cancelling only 27.72% of their Large Orders without them having begun to execute. It would likely have been possible for the Traders to execute a larger proportion of their Large Orders if it had been their intention for them to execute. 63.4 When the Traders placed Large Orders, they rarely priced them competitively, placing only 1.93% of them at the Best Bid or Best Offer price. In contrast, other market participants placed 80.34% of their Large Orders at Best Bid or Best Offer prices, or at improved prices. By placing their Large Orders away from the Best Bid or Best Offer price, the Traders were less likely to execute them. …”
“Section 118 of FSMA … 104. The Misleading Orders were not placed for legitimate reasons, nor did they conform with accepted market practice. In placing the Misleading Orders, Mr Urra gave or was likely to give a false or misleading impression as to the supply of, or demand for, the BTP Futures to which the Misleading Orders related. This was because in placing the Misleading Orders, Mr Urra signalled that he wanted to buy or sell a specified number of BTP Futures. In fact, he did not wish to trade in that manner and the purpose of placing the Misleading Orders was to facilitate the execution of Genuine Orders at a more advantageous price, or on a more timely basis, than would otherwise have been achieved but for his having misled other market participants by the Misleading Orders. … Articles 12 and 15 of the Market Abuse Regulation … 107. Mr Urra’s misleading orders were not placed for legitimate reasons, nor did they conform with an accepted market practice as established in accordance with Article 13 of the Market Abuse Regulation. In placing the Misleading Orders (alone or in concert with Mr Lopez and/or Mr Sheth), Mr Urra gave or was likely to give a false or misleading signal as to the supply of, or demand for, the BTP Futures to which the Misleading Orders related. This was because in placing the Misleading Orders (alone or in concert with Mr Lopez and/or Mr Sheth), Mr Urra signalled that he wanted to buy or sell a specified number of BTP Futures. In fact, he did not wish to trade in that manner and the purpose of placing the Misleading Orders was to facilitate the execution of Genuine Orders at a more advantageous price, or on a more timely basis, than would otherwise have been achieved but for his having misled other market participants by the Misleading Orders. … Fitness and Propriety 109. Mr Urra’s conduct in deliberately engaging in market manipulation was dishonest and lacked integrity. This dishonest conduct was highly likely to adversely impact other market participants and was repeated many times over a period of two months. As a result, he is not a fit and proper person to perform any function in relation to any regulated activity carried out by any authorised person, exempt person or exempt professional firm.”
“64. …Mr Sheth has also suggested that in some cases, where he placed multiple, overlapping Large Orders, these were in fact intended to be amendments to an existing Large Order. Whether or not this is true does not affect the Authority’s assessment of the purpose of the placement of a Large Order on the opposite side of the order book to a small order.”
“42. In order to establish market abuse, the Authority does not need to go further than that and show that the Traders knew that they were committing market abuse or that they were acting in a way which was dishonest or reckless. 43. Whether the Traders behaved recklessly or dishonestly is however a consideration which arises in relation to the prohibition order … as well as being relevant to the level of penalty…”
“FN147. For the avoidance of doubt, the Authority does not positively say that the Applicants’ conduct was reckless in circumstances where it is alleged to have been deliberate and dishonest. If, however, under its broad powers under s. 133(5), the Tribunal finds that market abuse is made out against the Applicants, but that their conduct fell short of being dishonest, the Tribunal will nevertheless have to address whether to apply a penalty against the Applicants and, if so, at what level. In order to address that question, it will have to consider the nature of their conduct, including whether it was reckless, on any view.”
“For the purposes of this Act, market abuse is behaviour (whether by one person alone or by two or more persons jointly or in concert) which - (a) occurs in relation to – (i) qualifying investments admitted to trading on a prescribed market, (ii) qualifying investments in respect of which a request for admission to trading on such a market has been made, or (iii) in the case of subsection (2) or (3) behaviour, investments which are related investments in relation to such qualifying investments, and (b) falls within any one or more of the types of behaviour set out in subsections (2) to (8). …”
“(5) The fourth is where the behaviour consists of effecting transactions or orders to trade (otherwise than for legitimate reasons and in conformity with accepted market practices on the relevant market) which - (a) give, or are likely to give, a false or misleading impression as to the supply of, or demand for, or as to the price of, one or more qualifying investments …”
“A person shall not engage in or attempt to engage in market manipulation.”
“the placing of orders to a trading venue, including any cancellation or modification thereof, by any available means of trading, including by electronic means, such as algorithmic and high-frequency trading strategies, and which has one of the effects referred to in paragraph 1(a) or (b), by: … (ii) making it more difficult for other persons to identify genuine orders on the trading system of the trading venue or being likely to do so, including by entering orders which result in the overloading or destabilisation of the order book; …”
“the extent to which orders to trade given change the representation of the best bid or offer prices in a financial instrument…or more generally the representation of the order book available to market participants, and are removed before they are executed”
“(a) Entering of orders which are withdrawn before execution, thus having the effect, or which are likely to have the effect, of giving a misleading impression that there is demand for or supply of a financial instrument […] at that price - usually known as ‘placing orders with no intention of executing them’… (g) The practice set out in Point 5(e) of this Section, usually known as ‘layering’ and ‘spoofing’;”
“(e) Submitting multiple or large orders to trade often away from the touch on one side of the order book in order to execute a trade on the other side of the order book. Once the trade has taken place, the orders with no intention to be executed shall be removed - usually known as layering and spoofing…”
“50. Thus, the essential ingredient is the giving of (or likelihood of giving) false or misleading signals as to supply, demand or price. Contrary to a submission by Mr Dhillon QC, that cannot always be an entirely objective enquiry, as it depends upon the signal given out (or likely to be given out) by a particular activity or behaviour. Depending on what that signal is (an objective question, to be sure), falsity might involve some subjective enquiry. The point of substance, therefore, is whether, as Mr Dhillon contended, there is no subjective element in the supply, demand or price signalling involved in this type of case (or, therefore, in considering whether there was any false or misleading signal). 51. I do not accept that contention. A seller wishing to sell at£10 who offers to sell at£10 but, finding no takers at that price, withdraws his offer because he does not want to sell for less, and a seller who has no intention to sell at£10 but who offers to sell at£10 to initiate or exacerbate a price trend, then withdraws his offer, appear to the outside observer to have behaved identically. If their behaviour fell to be judged entirely by that appearance, they would have to be either both guilty or both innocent of a charge of market manipulation. But in reality, surely the former is innocent, the latter guilty, and that is because although the signals sent out were the same (eg their initially signalled intention to sell at£10 ), the truth or falsity of those signals turns on their actual intentions, which differed radically. 52. It is no defence for the guilty seller to say that he did not appreciate he was sending out a false signal, or in some other way that he did not intend to manipulate. In that sense, the manipulation does not have to be deliberate; and that is the relevant proposition to derive from Financial Conduct Authority v Da Vinci Invest Ltd[2015] EWHC 2401 (Ch) ,[2016] 3 All ER 547 , [2016] Bus LR 274, per Snowden J at [104]–[108], decided unders 118 of the Financial Services and Markets Act 2000 (‘FSMA 2000’) implementing the EU Market Abuse Directive (European Parliament and Council Directive 2003/6/EC), which was the EU law predecessor to MAR. That is a different point, however, and the conclusion in that case, that there had been market abuse, required (and was justified by) the finding as to the actual purpose behind the relevant order activity (ibid, at [163]): ‘The purpose of the Traders was not in truth to sell or buy as indicated by the orders they placed. Instead, the Traders intended to cause a movement in the market price of the share … and to induce other market participants to place similar larger orders, with which the Traders could then trade aggressively in the opposite direction’. 53. Again, in my simple example, the time at which and market circumstances in which the initial offer to sell at£10 was placed might afford an argument that a seller looking to sell but unwilling to sell below£10 would have assessed that there was no sensible prospect an offer to sell at£10 might be matched and so would not have placed the offer. That might be an aspect of assessing the genuineness of the offer in fact placed, but it could not be a conclusion that foreclosed the inquiry.
“80. Then finally, to be clear, and applying what I said in paras [50] to [51] above, it is not the case that to find a pattern of repeated placement, cancellation and replacement is to find spoofing or layering, because the question remains one of intention to trade. For example, a trader wishing to sell off or reduce a long position, in response to the Muddy Waters tweets or simply in response to the price falling, might generate such a pattern as part of a best-execution strategy that aimed to maximise his average price traded while still selling the volume he wishes to sell. That execution strategy might or might not hit both of those targets; but if that is what he is doing, though he generates one of Prof Mitts’ patterns, he never gives out a false supply or pricing signal to the market since each of his sell orders is placed intending it to trade, each cancellation is a response to the lack of matching demand, and each replacement order is again placed intending it to trade. 81. Before getting into the detail, therefore, I am clear that Prof Mitts is wrong to opine that ‘repeatedly placing and cancelling orders in a very short time is strong evidence of manipulative intent’, or that ‘a wave of abnormal order cancellations [ie sell-side cancellations in statistically atypical volumes] at or above the best offer … indicates intentional manipulation of Burford’s share price’. Mitts 1 set out the logic for those claims, but it immediately betrays their error. The logic set out is that there is no economic justification for a short seller to place a large volume of sell orders above the best offer. The opinion that logic might justify, a more limited opinion than that expressed by Prof Mitts, is that a short seller repeatedly placing and cancelling orders in a very short time, above the best offer, is strong evidence of manipulative intent.”
“74 …When dishonesty is in question the fact-finding tribunal must first ascertain (subjectively) the actual state of the individual’s knowledge or belief as to the facts. The reasonableness or otherwise of his belief is a matter of evidence (often in practice determinative) going to whether he held the belief, but it is not an additional requirement that his belief must be reasonable; the question is whether it is genuinely held. When once his actual state of mind as to knowledge or belief as to facts is established, the question whether his conduct was honest or dishonest is to be determined by the fact-finder by applying the (objective) standards of ordinary decent people. There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest.”
“(5) In the case of a disciplinary reference or a reference under section 393(11), the Tribunal must determine what (if any) is the appropriate action for the decision-maker to take in relation to the matter, and on determining the reference, must remit the matter to the decision-maker with such directions (if any) as the Tribunal considers appropriate for giving effect to its determination. (6) In any other case, the Tribunal must determine the reference or appeal by either - (a) dismissing it; or (b) remitting the matter to the decision-maker with a direction to reconsider and reach a decision in accordance with findings of the Tribunal. (6A) The findings mentioned in subsection (6)(b) are limited to findings as to - (a) issues of fact or law; (b) the matters to be, or not to be, taken into account in making the decision; and (c) the procedural or other steps to be taken in connection with the making of the decision. (7) The decision-maker must act in accordance with the determination of, and any direction given by, the Tribunal.”
“In considering the appropriate level of a penalty we are not bound by the Authority’s tariff for particular misconduct, or even the factors the Authority takes into account, but may reduce or increase a penalty which is the subject of a reference on any grounds we think fit, within the parameters of the proper exercise of judicial discretion. In practice, the Tribunal respects the Authority’s tariff, in the interests of consistency between applicants, while departing from it in an appropriate case.”
“It was the FCA's submission, and I accept, that in determining any penalty under section 129, the starting point for the court should be to consider the relevant DEPP penalty framework that was in existence at the time of commission of the market abuse in question. To do otherwise would risk introducing an inequality of treatment of defendants depending upon whether the proceedings were taken against them under the regulatory route or the court route and depending upon how long the proceedings had taken to come to a conclusion. By the same token, however, in common with the Upper Tribunal, the court is not bound by that framework, or by the FCA's view of how it should be applied. But if the court intends to depart from the framework in a particular case, it should explain why it considers it appropriate to do so. It occurred to me that in this regard there is some analogy with the approach of the criminal courts to the application of the sentencing guidelines produced by the Sentencing Council.”
“Where a client submits RFQs to Sales staff by voice (on the phone) or through Bloomberg message/chat functionality, MHI responds to these RFQs by voice or Bloomberg message/ chat. Whilst these client interactions are recorded and records maintained (e.g. phone records, Bloomberg message/ chat records), they are not maintained centrally in an easily searchable format, and as such we have not included these in the attachment. On occasion, the EGB desk may be asked to ‘work an order’ (for example, where the price quoted by MHI is rejected by the client, the client may ask the desk to trade if the price reaches a certain level). This will usually be done over the phone or through Bloomberg message/ chat. The desk has previously informed MHI Compliance Department that orders represent 1-3% of all trading activity. In order to prepare a list of RFQs and orders received from clients by voice or through Bloomberg message/ chat during the period requested, a detailed review of electronic communications and telephone recordings between Sales staff and MHI clients would need to be undertaken.”
"48. In this regard I would say something about the importance of contemporary documents as a means of getting at the truth, not only of what was going on, but also as to the motivation and state of mind of those concerned. That applies to documents passing between the parties, but with even greater force to a party's internal documents including emails and instant messaging. Those tend to be the documents where a witness's guard is down and their true thoughts are plain to see. Indeed, it has become a commonplace of judgments in commercial cases where there is often extensive disclosure to emphasise the importance of the contemporary documents. Although this cannot be regarded as a rule of law, those documents are generally regarded as far more reliable than the oral evidence of witnesses, still less their demeanour while giving evidence. The classic statement of Robert Goff LJ in The Ocean Frost[1985] 1 Lloyd's Rep 1 at p.57 is frequently, indeed routinely, cited: "
“75. Furthermore, as Mr George submitted, the principle enunciated in Wisniewski v Central Manchester Health Authority [1998] 1 PIQR 324 is relevant in this regard. As was stated at page 340 of the judgment in that case, in certain circumstances the court may be entitled to draw adverse inferences from the absence of a witness who might be expected to have material evidence to give on an issue in action. In circumstances where the reason for the absence of the witness satisfies the court, then no such adverse inference may be drawn but in circumstances where it might have been expected that a party would call a particular witness then such an inference may be drawn. If the court is willing to draw such inferences, they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, produced by the party who might reasonably have been expected to call the witness. 76. We received no explanation as to why other witnesses who may have given relevant evidence as to the documents from which we were asked to draw inferences were not present, as mentioned at [65] above, and in those circumstances, we are entitled to draw adverse inferences from their absences. We have done so to the extent that we have given more weight to Mr Forsyth’s evidence as regards the documents in question and less weight to the evidence that the Authority sought to rely on in that regard.”
“To manage and develop the European Rates Platform at MHI. To work in conjunction with the Head of Fixed Income trading to build a Rates platform capable of delivering recurrent client-flow orientated revenues and contributing positively to the Fixed Income bottom-line. … • To evaluate and manage the existing team of EGB traders with a focus on co-ordinating risk taking from a top down perspective • To be responsible for the collective risk of the EGB desk in respect of Front Office and Risk Committee limits - to work to enhance the sophistication of the relevant limit infrastructure and controls • To ensure pro-active risk management of positions, right sizing the risk appetite and balance sheet utilisation according to liquidity conditions and client flows • To market-make and trade the 0-5 yr part of the curve for all countries with a view to enhancing client flows and generating revenues”
“Managing Performance. As a manager it is a requirement of your role to ensure that each member of your team is competent to perform their role... Overall Statement of Responsibility. All employees of the Company at whatever level of seniority have responsibility on a day to day basis for ensuring that there are clear and appropriate reporting lines between them and others for whom they are responsible and that any delegation of duties is to suitable persons, subject to appropriate supervision and monitoring.”
“A trader is looking to unload 3,000 shares of QuestQuo plc, a relatively illiquid stock with an average order size of 1,500 shares on either side of the order book. As the price looks a little low, the trader placed an order to buy 100,000 shares just under the lowest bid on the market. As a result of the large order, there is an uptick in the market price, upon which the trader places an order to sell his 3,000 shares into the market, which is fully executed. The trader then immediately deletes his buy order.”
“Making trades purely to manipulate market prices is prohibited. The traders’ behaviour is known as spoofing/layering and is very likely to be seen by the regulators as market manipulation.”
“The Compliance function conducts transaction and communications surveillance, in accordance with a risk based approach, as the second line of defence function responsible for monitoring market conduct. An enhanced market abuse monitoring system (Trading Hub) was selected in 2015 and is in the process of being fully implemented; At the time at which the order placing and cancellation practices described above were taking place, neither the Front Office nor Compliance were able to monitor such activity, as orders were routed through MSUSA and MHI maintained records of trades executed, but not orders. Orders were being monitored by MSUSA. Arrangements are currently underway to ensure that Eurex orders are captured within Trading Hub.”
“On29th June 2016 starting from 12.58.50 pm (CET) four bid orders of 200 and 500 contracts were entered in the order book of the FBTP SEP 16. Some seconds later starting from 12.58.57 pm (CET) ask orders with a volume of 25 contracts in total were executed. Immediately after that, the four bid orders of 200 and 500 contracts had been cancelled without execution. Almost the same scenario could be observed on the same day at 15.30 pm (CET). The two described trading scenarios could constitute a breach of §17 of the Exchange Rules of Eurex Deutschland and Eurex Zürich and §20a of the German Securities Trading Act (WpHG). … 3. Please explain the underlying strategy of the orders and transactions as detailed as possible. Please describe in particular why you entered bid orders with a high volume and traded on the ask side. Please also explain why you deleted the bid orders without execution.”
“Mr Urra noted that the desk had concerns that futures orders placed by MHI were being front run, possibly by algorithms … MHI had raised this with Bloomberg and MSUSA. Mr Urra stated that MHI undertook “price discovery” by putting capital at risk and that adding size to an order neutralised this front running effect. Mr Urra was asked whether this was the reason for these trades that Eurex had highlighted and he stated that this would not have been the reason for placing these orders.”
“Given that the orders were in keeping with the desk’s market making remit and risk limits, that the orders were available to the market for long enough to be executed and that there is no direct evidence to the contrary, we conclude that there was an intention to execute the orders as placed. … We have obtained no direct evidence that the Desk entered large orders in order to create abnormal or artificial prices on the Exchange. Whilst the Desk may have intended to execute the large orders if filled…the possibility remains that the primary motivation in placing such orders was to facilitate the execution of the Desk’s concurrent smaller orders at particular prices… Our overall conclusion is thus indeterminate as to whether the Desk was attempting to create artificial prices…”
“What impact, if any, would the trading instances identified in the Instance Pool have on the market (considered by reference to the impression and/or signal as to the supply or demand for, or price, of BTP futures that the trading instances would give or be likely to give to the market, if any)?”
“With respect to the placement of these orders away from the touch, in my view a larger order offset to the touch would have meant that the order would be given much less consideration by other market participants compared to if those larger orders were placed on the touch (with zero offset to the touch). In my experience, traders focus much more on orders placed on the touch rather than offset two or three cents behind the touch (in a highly liquid market, as this was, the bid ask spread will be narrow as the market is highly competitive, therefore bids and offers would be aggressive and narrow the spread). Orders placed offset to the touch will in my experience be ignored by market participants, as would have been the case with the larger orders within the Specified Instances.” (2) Addressing the placing of multiple orders by Mr Sheth: “In my experience of managing desks with junior traders, this explanation is plausible, and it is not an unusual error.”
“The large futures orders, to the extent that these were placed with a view to establishing a hedge against expected near term customer trades or to establish a basis position for future sale to clients, would fall into the category of “anticipatory hedging”, and are permitted by the Desk’s mandate.”
“Pre-hedging in these circumstances involves taking a position before the client order is executed to mitigate the risks associated with execution. Hedging in advance aims to protect the trader from market volatility that may occur whilst the client order is being executed.” (2) The wider concept of “anticipatory hedging” is not linked to a client enquiry or trade, but involves “taking a position in a security or derivative instrument that is expected to offset the potential losses that may arise from market movements”