Jorge Lopez Gonzalez & Ors v The Financial Conduct Authority

Market abuse is established where orders are likely to give a false or misleading impression or signal as to supply, demand or price, and the trader did not intend the orders to trade. The Authority need not prove actual market impact, an intention to manipulate, or dishonesty. Whether the signal is false may require examination of the trader’s actual intention. Repeated large orders placed away from the touch, overlapping with smaller orders in the opposite direction and cancelled shortly after those orders fill may support an inference that the large orders were not intended to trade. A legitimate trading strategy must nevertheless be assessed against all the evidence, including the trader’s conduct, market conditions and applicable mandate. Deliberate market abuse may also amount to dishonesty under the objective standards of ordinary decent people.

The Financial Conduct Authority issued Decision Notices prohibiting three Mizuho International Plc traders from performing functions in relation to regulated activities and imposing financial penalties. The traders referred the decisions to the Upper Tribunal. The references concerned orders placed in BTP Futures on Eurex between 1 June and 29 July 2016. The Authority alleged that large orders were placed to create false or misleading signals and facilitate smaller genuine orders on the opposite side of the book. The traders said the orders formed part of legitimate information-discovery or anticipatory-hedging strategies. The Tribunal had to determine whether the conduct amounted to market abuse under Financial Services and Markets Act 2000 and the Market Abuse Regulation, whether it was dishonest and lacked integrity, and what penalties and regulatory action were appropriate.

1. Market abuse. The essential ingredient under s 118 FSMA 2000 and Articles 12 and 15 of the Market Abuse Regulation was the giving, or likelihood of giving, of a false or misleading impression or signal as to supply, demand or price. The inquiry into the impression or signal was objective, but whether it was false could require a subjective inquiry into intention to trade. Actual market impact and an intention to manipulate were unnecessary.
2. The Tribunal found that the large orders were large for the Eurex market, generally visible, close enough to the touch to affect perceptions of supply and demand, and likely to cause the market to move towards the smaller orders. The pattern of overlap, short periods on the book, repeated cancellation shortly after the smaller orders filled, and exceptionally low execution rates supported the conclusion that the large orders were not intended to trade.
3. The information-discovery strategy relied upon by Mr Urra and Mr Sheth was implausible and inconsistent with the trading activity. It was also outside the Desk’s Mandate. Mr Lopez’s anticipatory-hedging strategy was legitimate in principle, but the version relied upon was insufficiently predictable, involved unjustified directional risk, did not explain late-day orders or the repeated cancellation pattern, and was not within the Mandate’s exception for a highly likely near-term exposure with a sound risk-management rationale.
4. The Tribunal found that each trader deliberately placed the large orders to facilitate execution of the smaller orders and knew that the resulting impression or signal was false or misleading. Each had therefore engaged in market abuse under s 118(1) and Article 15. Applying Ivey v Genting Casinos Ltd [2017] UKSC 67, each trader’s conduct was dishonest by ordinary standards.
5. The non-disciplinary references against the prohibition orders were dismissed. The references were remitted to the Authority with directions to impose penalties of £223,400 on Mr Urra, £100,000 on Mr Lopez and £57,600 on Mr Sheth. The decision was unanimous.

The judgment records that the three applicants referred the Authority’s Decision Notices to the Upper Tribunal. The references were heard together. The Upper Tribunal dismissed the non-disciplinary references and remitted the disciplinary references to the Authority with directions.