A class action lawsuit filed in the Southern District Court of New York accuses State Street’s Currenex of secretly abandoning its “first-in-first-out” (FIFO) feature, by which the ECN matches trades and having “secret priority agreements” with certain privileged liquidity providers – Goldman Sachs, HC Technologies, State Street, and five “John Doe” defendants – under which the Defendants could jump in line and consummate a trade without entering a competing quote.
The class action is being led by Edmar Financial and Irish Blue & Gold Inc, but apparently included “several hundred and potentially thousands” of plaintiffs – interestingly, both lead plaintiffs are associated with an independent FX trader named Matt Edwards, who is based in Florida, and is named as an inactive director of Edmar and worked for over seven years, according to his LinkedIn profile, at Irish Blue & Gold.
The Full FX View
Perhaps the first thing to say about this lawsuit is that it feels like something has been coming for a very long time. Rumours of certain LPs being given special deals have flown around the FX market from the early years of this century and, as this writer can attest, have often been part of attempts to “brief against” competitor platforms.
The initial challenge was, what happens on a central counterparty OTC ECN when top of book inverts? In the early days of the CCP ECNs, the technology was such that this happened reasonably often, and no platform – publicly at least – explained how they dealt with the problem, if indeed it occurred.
A second aspect of this filing is that a degree of “inside” help may have been provided, whether it be a whistleblower or disenchanted ex-employee. There seems to be detail around internal procedures that have either been invented very cleverly, or have some basis in fact – that will be for the legal system to decide.
Where there is less detail is in the accusations against State Street and Goldman Sachs in particular, and if this case goes to court, it will be interesting to see what evidence the plaintiffs have against these parties. Currently a lot of the lawsuit deals in inference, especially around individual connections. Those between Currenex and HC Tech are clear and obvious as several Currenex staff were involved in HC Tech, the Goldman connections stems around one person, who allegedly signed the priority agreement and then went to work for Currenex. Similarly, the State Street connection is obvious – through ownership – but few details are provided. It could be argued that these firms were merely signing (if they did) a deal that was beneficial to them and that they were assured it was within the platform’s rules.
Of real concern is the allegation that both Currenex and State Street were tipped off to the activity – again this infers inside knowledge of events – for the abandonment of FIFO is a fundamental breach of what is, and always has been, a basic tenet of central limit order books. This dates back to the voice broking days before electronic trading (and of course is a fundamental of pit trading before that), so the suggestion that FIFO was not in operation, when disclosures said it was, should have rung alarm bells amongst compliance teams.
With the added ingredient of (asymmetric) last look thrown in, this case, should it get to trial, will again challenge the FX market’s standing with the outside world. The FX Global Code has done much to improve matters and give the industry a grounding for defending itself – and again these are largely historic actions being claimed – but just as was the case in the early 2000s, whispers of dubious conduct continue to do the rounds, this time involving last look.
The FX industry still has more to do on this subject and anonymous trading remains a really challenging aspect of the reform process. The sense is the FX industry has generally cleaned itself up well, but that even more needs to be done around disclosures – specifically there is a need for some form of supervisory process that allows an authority to conduct random checks that the basics of FIFO and last look frameworks are being adhered to. All rulebooks on public platforms should be made public (as several already are) and be made more detailed. All platforms are on notice to ensure they operate to the highest possible ethical standards.
For what this latest lawsuit highlights is that – even if the allegations are unproven – the FX industry remains vulnerable to the lowest common denominator in conduct terms and there is an atmosphere of distrust in the industry.
In the filing, the class says it expects to be able to name the John Doe defendants during the discovery process – the Currenex ECN is anonymous with a central counterparty – it is not clear how the plaintiffs identified Goldman, HC Tech and State Street. The lawsuit merely states, “HC Tech provided approximately 10% of the liquidity on the Platform, while Goldman and State Street were among the largest providers on the Platform.”
The accusations made are that Currenex explicitly abandoned FIFO to allow the trading defendants to jump the queue. This was facilitated by what the lawsuit says were “secret priority agreements” aimed at building up liquidity and volumes on the platform. These led to “artificial” spreads and financial disadvantage to the class, it is claimed. The lawsuit also argues that by not having the opportunity to be price makers on the ECN, the class were unable to trade at top of book because the defendants jumped the queue thanks to the lack of FIFO.
The lawsuit alleges that the super-priority rights existed “at least as of 2005”, it adds that then-Currenex executives Cary Rosenwald and Sean Gilman “helped create the system”, before moving to found HC Tech. Also named in the filing are Currenex’ former global head of sales Russell Sears and current global head David Newns. The lawsuit alleges Sears negotiated “many” of the secret agreements and that Newns conducted “prioritisation experiments” to compare fill ratios between those with priority rights and those without. It further alleges that Currenex and State Street were “tipped off” to the activity, but did nothing.
Another aspect to the alleged misconduct are claims in the filing that HC Tech, around 2011, was given an exclusive live feed of all orders on the platform, that enabled the firm to see all activity, including hidden orders on the venue. It also alleges that Currenex itself exploited its own similar see-all access to conduct “triangular arbitrage,” where it would compare the available prices on at least three overlapping FX trades in order to capture the arbitrage profits before regular customers trading on the affected pairs.
Perhaps inevitably, last look is also raised in the lawsuit, although it is noted that Currenex did publish “in general” last look disclosures in 2015, the plaintiffs argue they were misled as to how often their trades would be rejected. They further argue that the combination of the defendants being able to jump the queue and then reject the trade using last look, exacerbated the financial cost to the class.
The use of asymmetric last look is also raised, the filing suggesting that improvements were not passed on to clients, on accepted trades, while market moves against the LPs were rejected. It also states that on the Currenex ECN, users are “typically” not advised of rejected trades.
The alleged behaviour is said to have started in 2005, however the lawsuit alleges it continued after State Street bought Currenex in 2007 Edmar Financial signed an agreement with Currenex in 2010 and Irish Blue & Gold in 2014. The defendants have yet to make a statement on proceedings.