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

Members of MHI’s Compliance team interviewed the Traders and Mr Heiberg. The notes of those interviews were prepared by Compliance, and were signed (unamended) by the relevant Trader. Giving evidence, the Traders challenged the accuracy of these notes.

Mr Urra was interviewed by Mr Joshi, Mr Algeo and Mr Lloyd (all from Compliance) at 8.30am on 29 July 2016. The note of that meeting records that Mr Urra had noted that the orders looked strange. It records:

“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.”

When he returned with a written response at midday, the note of the meeting records Mr Urra “stated that the large bid orders related to liquidity provision to get some size into the books into a curve position, for example if other dealers were hit by cash bond sellers at once. Mr Urra added that the multiple large orders being placed on the book was an error – the correct procedure should have been to amend the price of the original order”.

The Tribunal did not have a copy of Mr Urra’s written response which he provided at that time. Mr Urra produced a second draft on 2 August 2016. That note, which was included in the MHI Compliance Report, says “… the ask side trades refer to hedging at market level of cash transactions and the bid side liquidity provision below the market refers to an interest to get some size into the books into a curve position in case other market participants decide to take advantage of the size of the bid, which could have happened should the cash bond sellers or futures block hedging of the time were hitting several dealers at once”.

Mr Urra was then interviewed by Mr Joshi, Mr Algeo and Mr Tippetts on 5 August 2016. The note has a sub-heading “Price Discovery rationale” and refers to MHI not having the same level of information as primary dealers in the market as they do not see the flow, that the desk may contribute liquidity to the market and that they only decide to use price discovery if they feel “blind” to what is going on and need to gather more information to give them direction. The Desk began trading in this way around March 2016.

Both of these notes were signed by Mr Urra on 12 October 2016, and when giving evidence Mr Urra said he had not scrutinised them at that time.

Mr Sheth was interviewed by Mr Algeo and Mr Lloyd on 3 August 2016. The note of the interview says that Mr Sheth explained that the large buy orders placed beneath the current market execution price provided information on the market. The futures market was not very liquid, and price transparency was not great as much use was made of hidden orders. Mr Sheth said that the Desk suspected that their orders were being “front run” by other firms’ algorithms, and “Mr Sheth noted that the placing of large opposite side orders away from the current traded market level often had the effect of enabling the desk to get their smaller orders executed at the current traded market level”. Mr Sheth explained that the large orders were used for price discovery purposes on other occasions, eg to price up a security for a client, rather than as part of filling a client order. The entry of multiple large orders was said to be a mistake.

Mr Sheth was interviewed by Mr Joshi and Mr Tippetts on 9 August 2016. The background section of the note of that interview refers to Mr Joshi saying that he would like to understand the rationale for the transactions and to understand more clearly how the trading strategy aids price discovery. The note records that Mr Sheth explained that the Desk did not always put on orders on the opposite side of a small order. When a client asks for a bid/offer, the Desk does not have the complete picture of the market since they only see 10-20% of what is happening. Large orders were often priced two or three ticks away from the market, but in BTPs that is not substantially away. The multiple orders were a mistake – a likely reason for this might have been that he had intended to cancel or amend the trade.

The notes of these interviews were signed by Mr Sheth but not dated.

MHI responded to the Eurex Letter, and Compliance then conducted interviews with Mr Lopez and Mr Heiberg.

Mr Lopez was interviewed by Mr Joshi, Mr Algeo and Mr Lloyd on 29 September 2016. The note of the interview records that Mr Lopez had stated that in April the Desk had been asked to get more business and increase flow. It needed to offer tighter pricing in order to achieve this and, as a result, better market information was needed. Mr Lopez said his order of 200 lots (in F174) had been for price discovery purposes, as some clients hit multiple dealers with orders at the same time. He also noted that if the orders were filled then they would be of benefit to the positioning side of the Desk’s activities. Mr Lopez expanded on the rationale for “price discovery”, explaining that the BTP market was less liquid than core markets and prices were more erratic. The purpose is to understand how liquid the market was in order for the Desk to be able to offer the tight pricing required by clients. This activity of placing orders, in part for price discovery purposes, had been common at his previous employer and it was a widespread practice in the market. Mr Lloyd had queried the sequence for price discovery – Mr Lopez agreed that a price discovery trade would be placed first, then based on the results a firm quote would be provided to the cash client and then a hedging futures order would be placed. The note includes a section on the placing of multiple orders, with Mr Lopez recorded as saying that this was “in part due to the configuration of the order book on his PC”.

Mr Lopez signed the note of that meeting on 11 October 2016.

Mr Heiberg was interviewed by Mr Joshi and Mr Lloyd on 6 October 2016. The note of that interview referred to them having previously had a number of conversations with him. In his view on the explanations it is said he had not been aware that the Desk was engaging in “this pattern of trading prior to the Eurex letter”, that Mr Urra had indicated that “this” was a one-off and had not disclosed that there had been a repeated pattern of similar trading. Mr Heiberg said that capturing a potential basis position was a possible explanation for these orders, but that the frequency, their size and timing meant this was “not a fully convincing explanation”.