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

Mr Urra and Mr Sheth both gave evidence that if the Large Order traded, this would be a profitable position for the Desk, emphasising that the Large Orders were placed away from the touch. Mr Sheth’s evidence in his witness statement was that he would have sought Mr Urra’s help to exit the position.

As a matter of fact, it is clear that the Large Orders in the Specified Instances were placed away from the touch, generally two to three ticks away, although some of Mr Urra’s Large Orders were at the touch during the course of the Instance.

At the risk of stating the obvious, any order, including the Large Order can only trade once the market price, the touch, has moved to the Large Order.

All three Traders submitted that the price of Futures would deviate from and then revert to a long-term mean – and more particularly that the Large Order would trade and then the market would immediately revert to where it was before the execution of the Large Order - and that this price movement could then be traded profitably. This submission is particularly relevant to the Information Discovery Strategy, but Mr Jaffey also cross-examined Mr Creaturo on this in the context of the risks posed by the Anticipatory Hedging Strategy.

Mr Kasapis’s evidence was that Mr Urra’s belief that the market would revert to its previous levels after transacting with a Posited Trader was well-founded. In his view, in highly liquid markets, prices often exhibit “mean reversion”, ie a tendency to return to their average levels following temporary deviations or fluctuations. In this context, when a trade is executed away from the equilibrium, the large number of active participants and high traded volumes act as a stabilising force, with participants taking advantage of any mispricing until prices are restored to their prevailing levels.

In cross-examination, Mr Creaturo did accept that prices fluctuate in the market, and can move back towards their previous levels after an initial movement, by way of reversion to mean. He agreed that if a Posited Trader aggressively traded at a premium, the market could return to its previous level if there is no further demand or external factors driving a broader movement. However, Mr Creaturo also considered it to be very speculative that the market would revert just because one trader had traded, and described any expectation of being able to profit in this situation as “wishful thinking”.

The Tribunal recognises that there was no data before us showing what actually happened where an order of 200 or 450 lots did trade. However, based on the evidence of Mr Creaturo, the daily average high/low of the Futures market, the daily price graphs, the known directional risk, and MHI’s information disadvantage as a result of seeing only a minority of client flow which restricted its ability to ascertain any mean price to which the market was likely to revert (or the likelihood or timescale), or whether price variations in the market were an anomaly or client flow, we conclude that any trading based on the perception that there would be a mean reversion or correction immediately after a Large Order traded would have been speculative; Mr Urra or Mr Sheth may have been able to profit in this situation, but they could also have made a loss.

During cross-examination, Mr Sheth gave the more detailed explanation of his “exit strategy” in the event that the Large Order traded, namely that he would execute an offsetting cash trade; and if he could not exit within a few seconds, he would have sought Mr Urra’s assistance. Mr Sheth accepted that the cash market moves in line with the Futures, so if the Futures prices had moved to the price of the Large Order the cash would follow, but his evidence was that he observed that the cash market “moves with a lag” and that he would have a cash trade lined up as a hedge which he could execute before the cash market moved with the Futures (and that the disappearance of this cash hedge could explain the timing of some of his cancellations of the Large Orders). However, there was no expert evidence supporting the existence of such a lag or that such a lag would be sufficient to enable a (human) trader, trading manually, to take advantage of this given that the cash market is automated. This had not been addressed in any of Mr Kasapis’s four expert reports. At the hearing, Mr Creaturo’s evidence was that it was not realistic to expect that Mr Sheth would be able to trade up to €50m in cash bonds at an attractive price before the cash market moved. We accept that evidence, and recognise that in a relative value trade the trader would be expected to initiate the least liquid leg of the trade first, ie the cash trade, as the trader has more certainty on both liquidity and price in the more liquid instrument.

The Tribunal concludes that if the Large Order had traded the relevant Trader would have acquired a speculative directional position, with the prospect of making a profit or realising a loss, and this would have represented a considerable risk on the book pending unwinding the position, the execution of an offsetting trade or winning a suitably sized client order in the right direction against which the position could be used as a hedge.