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

Market liquidity

Market liquidity

364.

Mr Kasapis’s analysis was based on three limbs:

(1)

analysis of the liquidity of the cash market;

(2)

volumes traded in Futures, including the liquidity ranking given by the Exchange and a comparison of volumes of Futures in the Relevant Period with other times; and

(3)

an “Other Participant Trade” analysis which looked at traded volumes around the time of each Specified Instance.

Heading
Introduction and summary
Decision Notices and Authority’s amended statements of case
Recklessness
Traders’ Replies and outline of trading strategies relied upon
Market Abuse
Dishonesty
Role of the Tribunal
Non-disciplinary references
Disciplinary references
Burden and Standard of proof
Evidence including witnesses who had not been called, information that is no longer available and relevance of delay
Outline of evidence before the Tribunal
Pace of Authority’s investigation and particularisation of its case
Lack of information that would have been available to the Traders during the Relevant Period
Passage of time, memory and witness evidence
Potential witnesses who were not called by the Authority
Authority’s Enforcement Division
Other traders on the EGB Desk - James Hill and Mehdi Barouti
Management and Compliance at MHI
Approach of the Tribunal
EGBs, market making, BTPs and BTP Futures
The Traders – roles at MHI and experience
Mr Urra
Mr Lopez
Mr Sheth
MHI and the EGB Trading Desk
Risk Management and Limits
MHI’s EGB Business
Financial Targets
Remuneration
Training
Monitoring of activity
Traders’ roles on the EGB Desk and interactions
Eurex Letter
Interviews with Compliance
Investigation by MHI Compliance
MHI disciplinary process
Interviews by the Authority
Traders’ explanations of rationale for the Large Orders
Information Discovery Strategy – Mr Urra
Information Discovery Strategy – Mr Sheth
Anticipatory Hedging Strategy – Mr Lopez
Trading Activity of the Traders in the Relevant Period
Illustration of application of Criteria to Trading Activity in Instances
Mr Urra - F7 at 15.31.06.983 on 7 June 2016
Mr Lopez - F56 at 17.02.08.899 on 15 June 2016
Mr Sheth - F55 at 16.55.33.255 on 15 June 2016
Dates of Instances
Number and size of Large Orders placed by the Traders in the Instance Pool
Small Order already trading
Amendment of price of Large Order after the Small Order filled
Small orders which overlapped with (and on same side as) Large Orders
Trading Activity of the Traders outside the Instance Pool
Non-Instance large orders and Lone Large Orders
Number of small orders placed
Trading Activity of other participants in the market
Market abuse
Evaluation – Whether Large Orders are likely to impact the market
Tribunal’s assessment of the Experts
Mr Kasapis
Summary of evidence of Mr Creaturo
Market liquidity
Liquidity of the cash market
Comparison of traded volumes of BTP Futures in the Relevant Period with other times and markets
Other Participant Trade Analysis
Whether Large Orders may influence other market participants
Market Trend Analysis
Bid-Offer Spread Analysis
Volume skew
Two very large trades in 2017
Conclusions on market impact
Evaluation – Whether traders committed market Abuse
Criteria used to identify the Instance Pool
The Trading Strategies – contemporaneous explanations
During the Relevant Period
Reactions to the Eurex Letter
Interviews with Compliance
MHI Compliance Report
Disciplinary interviews
Conclusions
Mandate
Information Discovery Strategy – plausibility
Price discovery
Splitting of orders by clients
Likelihood of hedging by other market makers
Whether placing Large Orders gave information benefit to MHI
Prospect of a profitable position and risk
Mandate and the Desk’s aims
Conclusions on plausibility
Information Discovery Strategy - operation
Clients in respect of whom the theory of splitting orders was tested
RFQ Traded Away
Times of day
Lack of documentary record of operation of strategy
Timing for which Large Orders were live and timing of cancellation
Placing of new Large Orders shortly after cancellation and switching of sides
Prospect of a profitable position
Overlap between the Small Orders and the Large Orders
Amendment of price of Large Orders
Reduced use of strategy over the Relevant Period
Conclusions on the Information Discovery Strategy
Anticipatory Hedging Strategy – plausibility
Use of terminology of pre-positioning and anticipatory hedging
Presentation of evidence by Mr Lopez
Responsibility for increasing success rate in medium-sized RFQs
Placing of anticipatory hedges at a beneficial price
Approach to increasing the hit ratio and winning these RFQs
93 RFQs and seeking to win this business
Directional risk and remaining competitive
Whether placing of large, uniceberged, orders was less likely to achieve Mr Lopez’s aims
Anticipatory hedging under the Mandate
Conclusions on plausibility
Anticipatory Hedging Strategy – operation by Mr Lopez
Speculative nature of anticipatory hedge orders
Timing of placing the Large Orders
None of the Large Orders traded
Approach to determination of anticipated buying or selling interest
Time for which Large Orders were live, amendments to price and cancellation decisions
Overlap with Small Orders
Size of the Large Orders
Conclusions on the Anticipatory Hedging Strategy
Placing of concurrent Large Orders
Collaboration
F30 at 17.39.34.225 and F31 at 17.45.10.137 on 10 June 2016
F84 at 11.24.53.106 on 20 June 2016
F174 at 12.58.50.334 on 29 June 2016
F209 at 10.12.49.319 on 22 July 2016
Conclusions
Plausibility of Authority’s case that the Traders conducted an abusive scheme
Whether the abusive scheme would have worked
Number and Size of the Small Orders
Market direction and Small Order already trading
Pricing of the Small Orders
Conclusions on facilitation of the trading of the Small Orders
Abusive scheme would not have benefitted the Traders
Absence of direct evidence of Traders collaborating to commit market abuse
Risk of detection
Authority’s alleged scheme cannot explain all trading activity
Trading Activity of the Traders in the Relevant Period
Amendment of price of Large Order in Instance Pool after Small Order filled
Lone Large Orders
Lone Large Orders placed by Mr Lopez
Lone Large Orders placed by Mr Sheth
Small Orders which overlapped with (and on same side as) Large Orders
F27 at 10.15.48.236 on 10 June 2016
F40 at 14.16.34.477 on 13 June 2016
F48 at 11.01.18.775 on 15 June 2016
F83 at 11.15.29.662 on 20 June 2016
F106 at 10.03.19.849 on 22 June 2016
F181 at 11.14.07.730 on 1 July 2016
F203 at 12.36.16.793 on 19 July 2016
F222 at 11.19.50.290 on 27 July 2016
Overlapping Small Orders that did not overlap with Large Order
Other Overlapping Small Orders
Conclusions on the Overlapping Small Orders
Conclusions on Market Abuse
Mr Urra
Mr Sheth
Mr Lopez
Prohibition orders
Penalties
Step 2: The seriousness of the breach
Step 3: Mitigating and aggravating factors
Step 4: Adjustment for deterrence
Step 5: Settlement discount
Authority’s determination of the penalties to be imposed
Assessment of the financial penalty
Mr Urra
Step 2
Step 3
Step 5
Mr Lopez
Mr Sheth
Step 2
Step 5
Directions
JEANETTE ZAMAN
The Cash BTP Market “BTP” stands for “ Buoni del Tesoro Poliennali ” (literally multi-year treasury bonds) which are long term bonds issued by the Italian Government. Alongside bonds issued by Spain, Portugal and Greece
Market making in EGBs is very competitive US legislation known as the “ Volcker Rule ” prohibits banks from engaging in proprietary trading (ie, short-term trading for their own profit) but allows an exception for “market-making-related activ
RFQs and cash trades
Hedging and trading BTP futures on EUREX Changes in market interest rates typically affect the price of the bond. In essence, when the market interest rate rises, the price of a bond falls and when the market interest rate falls, the price o
There are several types of BTP future depending on the notional maturity date of the underlying cash BTP. This case concerns a particular type of BTP future called a “Long-Term Euro-BTP Future” (“ BTP
MHI and the EGB Desk
GLOSSARY
APPENDIX 2 Example data for Trading Instances
At 15:31:07, Mr Urra placed a sell order of 40 lots as an Iceberg Order, iceberged with a maximum show of 9 lots at a time, at what was the Best Bid (crossing the spread) (the Genuine Order )
Approximately 11 seconds later (the remaining 22 lots of the Genuine Order still not having traded, and sitting at the Best Offer), at 15:31:18, Mr Urra placed a buy order of 444 lots, 1 tick below th
Conclusions