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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.

 
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.