The Upper Tribunal is considering three connected spoofing cases involving bond traders whose decision notices were published by the FCA back in 2022.

What happened?

The traders referred their decision notices to the Tribunal where they and the FCA each present their case. In 2022, the FCA proposed to ban and fine all three traders (one £395,000 and the other two £100,000) having concluded that, for around a two month period in the summer of 2016, they placed large misleading orders for Italian Government Bond futures (BTP futures) that they did not intend to execute, thereby giving false and misleading signals and a false and misleading impression as to the supply of or demand for the futures amounting to market manipulation contrary to Article 15 of the Market Abuse Regulation (or previously section 118(5) FSMA which the FCA regards as equivalent although worded slightly differently).

The FCA’s contention is that the objective of this activity was to assist in executing smaller orders on the other side of the book and it points to the fact that the misleading orders were not placed as iceberg orders; were placed at prices away from the best bid or offer (so were less likely to trade); and were cancelled once the smaller orders had been fully or partially filled. 

In accordance with FCA policy, the proposed fines were based on a percentage of the traders’ income in the preceding year subject to a minimum amount of £100,000.

What did the traders argue?

The representations made by the traders to the FCA differ in some respects and are summarised in some detail in the decision notices published in 2022. They variously included arguments concerning the following:

• Their previous unblemished records and good characters;
• That trading these bonds was only a small part of their responsibilities;
• That, despite being under pressure to increase their ‘hit rate’, achieving this would have minimal impact on their remuneration;
• A practice referred to as ‘price discovery’ which involved making deductions from certain activity (such as client requesting a quote) and testing these by placing orders which, if they traded, might be financially beneficial and provide useful market colour (or which could be cancelled after a time if they didn’t and which could itself provide useful intelligence);
• A practice referred to as “anticipatory hedging” which involved trading in anticipation of orders from clients in light of market movements and events; 
• It being common practice to cancel orders on the BTP market;
• That orders placed away from the spread would not be of interest to other traders and would not impact price;
• They were aware that trading was monitored and would not have risked committing abuse;
• There is no direct evidence of any dishonest conduct, collaboration or actual market impact;
• An internal investigation and disciplinary process were conducted but no direction was made to cease using the anticipatory hedging strategy.

What was the FCA’s view?

The FCA did not accept these representations for a number of detailed reasons set out in the notices, including placing reliance on what it viewed as the relatively large size of the cancelled orders when compared to the opposing executed orders and the proximity in time between the cancellation of the large orders and the completion of the smaller opposing ones. The FCA did not allege that cancellation of orders was of itself unusual or that cancellation of an order is misleading or that placing orders away from the spread negates intention to trade. However, the FCA’s analysis indicated that the traders had higher cancellation rates for large orders than other participants; more rarely placed them competitively and the features of the trading as a whole were consistent with there being no intention to trade. The FCA also appears sceptical of the benefits of the strategies described and that the activity was consistent with such strategies being genuinely pursued.  The FCA noted that it is not necessary for market manipulation to have actually impacted the market.  

This is a case in which the FCA’s conclusion appears to have relied more on statistical analysis and inference than on direct evidence such as contemporaneous communications of the individuals involved and such cases can be more difficult for the FCA.  

What are the next steps?

Following the hearing, the Upper Tribunal will determine what, if any, is the appropriate action for the FCA to take, and will remit the matter to the FCA with directions. We await the determination of the Upper Tribunal with interest and will be considering to what extent it assists traders and compliance teams in avoiding and detecting trading practices which may give rise to regulatory scrutiny.