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

The Futures market was particularly susceptible to changes in supply and demand due to the fact it had relatively (compared to more developed markets such as the Bund and US Treasuries) low liquidity and high volatility. He described liquidity as referring to the ease of buying and selling at each price point.

The Futures market used the iceberg functionality more than any other market. It was an important feature of the market because the market is less liquid and participants were generally not encouraged to show their size – the market responded to outsize moves in client trades or larger trades.

There were typically small volumes shown at the touch. Market participants use the volume in the stack to gauge whether the market is in balance or skewed towards the bid or offer price. More volume on one side of the market than the other is called a “volume skew” and effectively suggests to other market participants that demand is high (when skewed towards the bid side) or supply is high (when skewed towards the offer side). This implies that the next move in the price is likely to be upwards or downwards respectively.

This may cause a reaction in any market participant, but high frequency traders (and any algorithmic traders) are particularly sensitive to these calculations because they operate through algorithms, and are seeking to make profit by conducting high volumes of trades in both directions one or two ticks apart. Even a small skew towards the bid or offer side can trigger algorithms to sell or buy so as to avoid a loss caused by a one-tick move in the touch.

The Large Orders were not iceberged and they were sufficiently large to give the impression or signal to market participants of a noticeable change to supply or demand in this market at the point they were placed. His opinion was that the Traders’ challenge to whether the Large Orders were in fact “large” in size “misses the point” – it is the visible size of an order relative to the rest of the market at the time placed that is relevant when considering impact. In this context, Mr Creaturo’s opinion was that whilst 200 lots of itself was not unusually large, the orders were large compared to other visible orders on the market at the time they were placed.

Placing the Large Orders behind the touch was not consistent with the placing of large orders by other market participants. When looking at the SMARTS data, he saw a number of institutions that were engaging with the market and wanting to trade; the outlier was MHI not trading.

That the Large Orders caused a volume skew at the time they were placed can be seen visually from the Replay graphs provided for each Instance. They were often close to the touch (within three or four ticks), to which market participants are particularly sensitive.

The visible size of the Large Orders (whether alone or combined), the way they were priced, and the liquidity and volatility of this market, all made it likely that there would be an impact on the market, and that the most likely market reaction was to move away from the Large Orders, in the opposite direction. Therefore, if a Large Order was placed on the bid side it would be likely that the price of Futures would move up in line with higher demand, so that sell orders close to the touch were more likely to trade, and vice versa.

The Small Orders in the Instances were on the opposite side of the Large Orders, usually at or very close to the touch. In his opinion, a trader placing the Large Order would have taken the view that the most likely effect of that order would be to assist the execution of the Small Order on the opposite side of the book.

It was striking that MHI had such a high success rate (ie execution rate) on their small orders and such a low success rate on their large orders; he would expect it to be consistent with the ratio of other banks, but in smaller sizes.