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

As recorded at SOABF [27], MHI was a “third-tier” market maker in EGBs, and the principal purpose of the Desk was to service client demand. Given its position in the market, MHI had less visibility over client flows in the market than top tier market makers. It would receive fewer RFQs and received RFQs of smaller sizes. The Desk saw around 20-25% of the overall market activity, and the Tribunal finds that it had an information disadvantage in a very competitive market.

During the Relevant Period, the average size of Electronic RFQs for cash BTPs received by MHI was €5.1m. Only 3% of Electronic RFQs in cash BTPs received by the Desk were for €20m of bonds or more and had a maturity of five years and over remaining, for which 200 lots or more of Futures would be used as a hedge or partial hedge. The Desk had a low hit ratio when it came to winning cash trades valued between €15m to €25m with a maturity over five years - Mr Lopez only won three such RFQs in the Relevant Period.

The Desk generated its profits by capturing the Bid-Offer Spread and earning revenue on the inventory of securities it held from time to time. The Tribunal accepts the evidence of Mr Urra and Mr Lopez, which was supported by Mr Heiberg, that the Desk could not just be reactive: to be ready and competitive, they needed to take the risk of holding an inventory of cash bonds that they anticipated might be interesting or attractive, in anticipation of client demand and market movements.

The process for submission of and responding to RFQs is set out at SOABF [12] to [15]. RFQs are directed by clients at selected market makers chosen by the client, not the entire market, and RFQs are often sent to multiple firms simultaneously.

RFQs could be submitted by clients in different ways, namely Electronic RFQs, Voice RFQs and Bloomberg/Chat RFQs. The combined time that the original RFQ and the market maker’s price is live would typically be no more than five to ten seconds. The client will select and deal with the best price.

When the Desk carried out a client cash BTP trade of any size, it would generally hedge its position swiftly using Futures in order to manage the directional risk associated with the cash trade. MHI did not have an auto-hedging system, but did have software which assisted in calculating the size of the hedge. Such hedging would not be necessary if the order book was itself not flat at the relevant time and could therefore accommodate a particular risk. However, the Tribunal finds that the Traders generally tried to keep their books flat. This enabled them to stand ready to quote competitively on both sides of the market.

The Traders transacted all transactions in Futures manually, whether entering, amending or cancelling orders.

All of the orders in Futures placed by the Traders on the Exchange were executable.