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

The SOABF sets out the agreed background.

During the Relevant Period, the Italian government was a large issuer of debt and the largest component of this debt was BTPs. BTPs were traded in MTS and Brokertec (electronic bond exchanges) and through the voice broker market.

SOABF [7] refers to the obligations and costs associated with being a Primary Dealer in BTPs. However, Primary Dealers have access to superior market information compared to all other market participants. Market information comes from their obligations as Primary Dealers to purchase newly issued bonds, provide quotes in the secondary market and their high level of client and wider market engagement.

SOABF [9] and [10] record that market making in EGBs is very competitive, and that providing competitive prices involves traders continuously assessing what prices they are prepared to offer by reference to their own book and market conditions. In addition, we find that market making is extremely dynamic and volatile. To remain competitive, market makers continuously need to monitor supply and demand and adjust prices to reflect changing market conditions, and manage any acquired positions to ensure they are in a position to offer the most favourable pricing in both directions.

To state the obvious, to win an RFQ a market maker must offer a more competitive price than rival market makers. However, without sufficient information or adequate pre-positioning, a market maker may find that securing an RFQ results in losses (if they are not able to hedge the order profitably). For smaller market makers, this challenge is particularly acute.

SOABF [19] records that cash bonds are balance sheet and capital intensive, whereas Futures require limited capital until the futures contract expires and the cash bond(s) are delivered. In addition, we find that there were typically very different spreads in the cash market and the futures market. The spread in the cash market was generally about four ticks, whereas the spread in the Futures market was generally one tick. This meant that where a trader needed to hedge a trade it had executed in the cash market, it would be more expensive to cross the spread in cash than in Futures.

Most market makers, having traded in the cash bond market and who needed to hedge their risk, would hedge with Futures and would do so swiftly in order to manage their exposure to market movements. A market maker may not need to hedge if their portfolio had not been flat prior to the cash trade.

Futures may be traded electronically on Eurex. The exchange is anonymous, ie as a market participant it is not possible to tell who (whether institution or individual) has placed the orders.

Orders for Futures can be placed on Eurex at the current best price available in the market, ie the touch, or a different price. Orders placed at the touch are more likely to execute promptly, but orders do not need to be placed at the touch in order to trade. The quantity of lots available at any price point will vary.

Addressing orders which are not at the touch:

The ability to iceberg an order in Futures is described in SOABF [24]. As it is a feature of the trader’s systems, it may be affected by the latency of a trader’s computer systems. The process of the Exchange sending a message to the trader’s systems that the visible slice has been executed and the trader’s system placing an order for the next slice may give rise to a delay between the execution of one slice and the placing of the next. However, on the basis of the specific timings of the trading activity in the Instances, which included the trading of Small Orders which had been iceberged by the Traders, the Tribunal finds that such latency or delay can be measured in milliseconds.

As the use of iceberging is widespread and well-known, market participants are aware that actual liquidity in terms of available bids and offers is likely to be higher than what is visible on the stack, as portions of any given order may remain hidden as iceberged orders. As (can possibly be seen) in Appendix 2, the presentation of the stack in the Replay graphs in the Instances did show the individual orders at each price point (albeit only the visible non-iceberged portion of each order) and the horizontal scale meant that our assessment of order size was estimated rather than precise. It was not the Authority’s case that this is how the stack would have appeared to market participants at the time, and we were taken to screenshots of Bloomberg Escalator in the MHI Compliance Report which had been provided to Compliance by the Desk shortly after the Relevant Period. That presentation showed the total number of visible lots available at each price point away from the touch, and we also find that the total number of orders live on the stack was stated.

The use of iceberging means that the stack shows only the visible liquidity at any point of time – the actual liquidity is not known. In addition, counterparties could also agree block trades of 250 lots or more off market; these would be reported to the exchange after execution.