Upper Tribunal Tax and Chancery Chamber

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

Fecha: 31-Ene-2025

Information Discovery Strategy – Mr Sheth

Information Discovery Strategy – Mr Sheth

278.

Mr Sheth’s evidence was that he was also pursuing the Information Discovery Strategy, explaining that this had been shown to him by Mr Urra in May 2016, he understood it had been successful and Mr Urra had given him permission to use this himself. Any Futures orders in round numbers in excess of 200 lots would have been placed in pursuit of this strategy.

279.

Mr Sheth explained his understanding that the purpose of the strategy was to obtain information as to whether there was hidden liquidity in the cash market and create profitable positions as market participants looking to hedge cash trades would be willing to pay a premium to access liquidity:

(1)

Informational purpose – This was to conduct “price discovery”, and he understood this to mean that it would help the Desk discover the actual liquidity of the market and to enable the Desk to better price its trades, saying that it was to address the information imbalance suffered by MHI. The Large Orders were placed to test the theory that some counterparties would split up large cash orders between multiple market makers and therefore withhold their full position from MHI.

(2)

Creation of profitable positions – If clients were splitting their orders, the increase in cash market activity would in turn increase the activity in the Futures market and potentially affect Futures prices. It was assumed that market participants looking to hedge the cash trades would be willing to accept a less favourable price to access liquidity quickly. Given that the resulting movement in the market was generated in response to activity in the cash market, the theory was that the Futures market, all things being equal, was likely to bounce back, allowing the Desk to unwind the Futures position at a gain. In cross-examination, Mr Sheth said that he would have already lined up orders in a cash bond which the Desk considered was expensive in relative value terms. He would sell those, create a basis position where he is short an expensive bond versus Futures and could then market that position to relative value hedge funds. He would not have held the position for any longer than necessary.

280.

Mr Sheth became frustrated that this strategy was not working (none of his Large Orders traded) and, around the time of the Brexit referendum, he discussed this with Mr Urra who suggested to Mr Sheth that he move his large orders closer to the touch. Mr Sheth did try this, and it was his amending the price which led to the Multiple Large Orders, but was not successful and used it less.

281.

As to whether the Information Discovery Strategy complied with the Mandate, Mr Sheth’s evidence was that he didn’t believe he had seen the Mandate; for him, his manager had shown him this strategy and so it must be within the Mandate.