UT (Tax & Chancery) UT-2022-000134 UT-2022-000135 UT-2022-000137 - [2025] UKUT 00214 (TCC)

The Futures market was more liquid than most of the other interest rate derivatives markets on the Eurex Exchange in the Relevant Period. However, it did not have high levels of immediate liquidity at all times of day - there was significantly less liquidity after the cash bond market closed at 17.30 CET, eg in F32 (Mr Urra) where only 17 lots had traded in the five minutes before the Instance, and there was often not a high level of immediate liquidity around the time of the Specified Instances. This is evident from the Replay graphs produced by the Authority (as at the time each Large Order was placed in the Specified Instances) and by the Other Participant Analysis conducted by Mr Kasapis. By way of illustration:

Only 0.02% of Futures orders placed on the Exchange in the Relevant Period were of 200 lots or more, and whilst the number of such orders (2,872, of which 2,406 were placed by other market participants) means that they were showing on screens multiple times per day, this is a very small proportion of the Futures activity that was seen on the market. This leads us to conclude that the Large Orders were large for the Eurex market. (They were also large by reference to the size of MHI’s market making business and related hedging, but we do not consider that to be relevant when assessing market impact.)

That the Large Orders were large in size for the Eurex market was illustrated by the Replay graphs in most of the Instances to which we were taken throughout the cross-examination of the Traders at the hearing. By way of illustration:

Whilst the Futures market used iceberg functionality more than any other market, such that other market participants knew there was additional liquidity of unknown amounts throughout the stack, the visible lots of the Large Orders would not have been identifiable as single orders. A consequence of this is that other market participants could not have reasoned that orders of this size were unlikely to be iceberged.

None of the Large Orders to which we were taken were placed at the touch (although there were Specified Instances for Mr Urra where he amended the price to move the Large Order to the touch, but then moved the order away again). The Traders’ evidence was that market participants primarily focus on what is happening at the touch. Whilst we accept that this would have been important, we accept Mr Creaturo’s evidence that the Large Orders were close enough (generally two to four ticks away) that they would not only have been visible but also would have formed part of other market participants’ views on supply and demand at the time at which they were placed. This is particularly the case given the relatively low levels of visible liquidity at the touch in most of the Instances.

The result of this is that the Large Orders were each likely to give the impression or signal of significantly increased supply or demand, and we accept Mr Creaturo’s evidence that the most likely market reaction would be for the market to move in the opposite direction to the Large Orders, ie towards the Small Orders. We do not accept the Traders’ submission that this conclusion is inconsistent with the SMARTS data in relation to the large orders placed by other market participants (which were also not iceberged). Mr Jaffey’s submission, in particular, was that the Authority’s position was akin to arguing that all of these large orders would have been moving the market yet, he submitted, there was no evidence of this. That is not our conclusion; we rely on the size, time at which they were placed and price of the Large Orders in the Specified Instances. We did not have specific evidence in relation to the market, timing or the price of the 2,406 large orders placed by other market participants but 72.28% of these partially or fully traded and 80.34% of these were at the best or improved prices. These were thus mainly at the touch, or crossing the spread, ie, as Mr Creaturo put it, engaging with the market. (This can also be said of the “larger” Small Orders which were not iceberged, eg in F150 Mr Urra’s Small Order of 90 lots was not iceberged and had been placed at the touch.) We have taken these other large orders into account, but the fact that they were placed, and we infer that those that did not trade (or trade fully) were cancelled (as a matter of good order management), does not undermine our conclusion in relation to the Large Orders placed by the Traders.

We accept Mr Creaturo’s evidence that a Trader placing the Large Order in these circumstances would have known of this likelihood.