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

The overlap between a Large Order and a Small Order in the opposite direction is one of the Criteria. The Authority challenged Mr Urra’s and Mr Sheth’s explanation that the two orders were often prompted by the same client activity, and that the overlap was thus a feature of the Information Discovery Strategy. This was on the basis that:

The Tribunal considers that the above submission raises several different issues.

We agree with the Authority on the first of their reasons – whether it be the identity of the client, the size of the RFQ, or the prospect of there being size in the market at the relevant time of day, the “triggers” identified by Mr Urra and Mr Sheth (or suggested by Mr Kasapis and agreed by them to be plausible) are inherently implausible. They would involve a client splitting an order on a bizarre basis, unseen in the market.

We consider the Authority’s second reason in support of its submission does not fully address the explanations provided by Mr Urra and Mr Sheth as to Large Orders being prompted by Voice RFQs or Bloomberg/Chat RFQs which traded away, and thus where there was no cash trade executed by MHI. However, if a Large Order was placed to test the theory of clients splitting orders in relation to an RFQ which had traded away, this itself raises a different question as to the overlap between the Small Orders and the Large Orders, including as to the very fact of the overlap (separate from the coincidence in timing of cancellation of the Large Orders).

As to whether they have identified a trigger, Mr Sheth has identified the activity which he says could have triggered his use of the strategy for most of the Specified Instances. It was Mr Urra who has not reconstructed this information, and only considered that three of the cash bonds identified by Mr Kasapis were plausible. It was, however, Mr Sheth who had tested the strategy having identified that Mr Lopez had bought a bond on MTS, as in F174, where there had been no client RFQ. The fact of an overlap in that situation can be attributed to Mr Lopez placing a Small Order to hedge that cash transaction; however, we consider it almost incredible that in this situation Mr Sheth would hypothesise from this that a client might be splitting orders. This is made even more unlikely by the fact that this was one of the two Instances identified by Eurex at the end of July 2016, so Mr Sheth would have been well-placed at that time, having been interviewed by Compliance on 3 August 2016, to have investigated the activity to be able to provide as much evidence as possible to Compliance at his second interview on 10 August 2016.

In addition, Mr Sheth identified that the Authority had challenged a Large Order he had placed in an Instance that did not overlap with a Small Order. In his witness statement Mr Sheth referred to his placing of two Large Orders in F151, both of which were relied on by the Authority. The second Large Order in that Instance was placed 2.655 seconds after Mr Lopez’s Small Order filled. He said this was not consistent with the Authority’s case theory (and drew attention to Mr Lopez’s Small Order to buy 97 lots already having started to trade when he placed the first Large Order). Mr Sheth’s review of the cash trades led him to suggest that the Large Orders may have been placed to test the theory against Banca Carige, who had submitted a sell-side RFQ for €25m ten-year bonds which had been won by Mr Urra.

In F151 the first Large Order did overlap with the Small Order, and the stack at the time that Large Order was placed shows about 15 lots visible at the touch on the sell-side, when Mr Lopez still had 73 lots remaining of his Small Order. Mr Shivji submitted that Mr Lopez’s Small Order was a hedge for Mr Urra’s book and submitted that the market had been rallying significantly and Mr Sheth’s orders were trying to cool the market down. Mr Sheth’s response in cross-examination was that it was preposterous to suggest that the two Large Orders would have caused the market to cool down by 20 cents. We agree with Mr Sheth that, whilst the remaining activity in this Instance meets the Criteria and fits with the pattern relied upon by the Authority, the second Large Order, which is relied upon as a misleading order, does not overlap with an order on the opposite side of the book, and there was no evidence in support of Mr Shivji’s submission that the placing of this order may have been to cool the market in case there was more to do.