The Last Look…
Posted by Colin Lambert. Last updated: October 17, 2023
The trial of former Glen Point Capital CEO Neil Phillips has taken an interesting turn after a few weeks of squabbling over what witnesses should, or should not be called, because the identity of the seller of the barrier option he is alleged to have triggered has been revealed.
Prosecutors had sought to keep Morgan Stanley’s name out of the case, however documents published recently name that bank as the seller of the USD/ZAR digital barrier that provided a $20 million pay off to Glen Point. Phillips, meanwhile, is clearly seeking to bring the bank’s role in the trading on that Boxing Day in Singapore, into the limelight.
I have noted before that while it seems pretty obvious that Phillips was targeting the 12.50 level in thin markets – his instructions on the chat to Nomura in Singapore, the executing bank, were pretty explicit – the actual amount it took to hit the 12.50 barrier, over $700 million, suggests there was quite a bit of activity on the other side.
The inference Phillips is making, and it is hard to disagree, is that while he may have been trying to trigger the option, the seller was just as eager to defend it with substantial bids.
There is more to it than that, however.
The case is likely to come down to intent, and here things get a little trickier for the defence. There are always option-related trades in the market, not least delta and gamma hedges, which are often executed according to a programme. By bringing Morgan Stanley into the mix, the defence is clearly looking to argue that if Phillips’ trading was illegal, so too was the option seller’s, but it really depends upon how much and where those trades were executed.
This brings us back to intent. One of the expert witnesses called by the defence – their appearance was challenged by the prosecution to no avail – was likely to testify that “successful FX traders must be able to predict the existence of liquidity and correctly time and size trades to take advantage of liquidity”.
This is all very well, but as the chats (and how many times do chats come back to haunt traders?) highlight, Phillips was warned by the Nomura salesperson that liquidity was “very thin”, and it was, lest we forget, 26 December in the Asian morning. It is hard to accept that this was a liquidity-seeking trade.
The other interesting factor with intent will be how easily, or otherwise, it is for the defence to ascertain the exact level of buying by Morgan Stanley in USD/ZAR – and where it took place. There is no doubt that sellers of barrier options often buy/sell in front of the trigger to avoid paying out – the question is how aggressive are they and do they broadcast that intent?
The problem for Phillips is that he explicitly stated on the chat to Nomura that he wanted the market through 12.50, and that was when it was multiple big figures away, not just one or two hundred points. His selling started at 12.62, and the chats published by the prosecution indicate that the first $100 million pushed the market five big figures. It would be insightful to know the exact level the Nomura salesperson was referring to when noting “there are still strong bids despite our aggressive offers here”, for that is probably the first sign of a potential barrier defence.
What would be helpful from this case is some clarity over the whole practice of defending, as well as targeting, barriers
I have written before that this is a potentially tricky problem for FX market participants because it is broadly accepted that barriers are both targeted and defended at times. It is not helpful that the prosecution seems intent on targeting one party, but, to be fair, Phillips’ chats do signal intent, whereas to date there is nothing in black and white about a deliberate defence.
What would be helpful from this case is some clarity over the whole practice of defending, as well as targeting – a successful prosecution in its current form only leaves unanswered questions. We are unlikely to get that, not least because as has been proven before, unpicking trading patterns in the OTC spot FX market is akin to looking for the needle in the proverbial haystack.
And it is this that I think puts Phillips’ defence on the thinnest ice. The chats signal a clear intent to get USD/ZAR – at a tremendously illiquid time of day and year – through a certain level. If it were not for these, the authorities would have had all sorts of problems trying to unravel the course of events. The fact is, however, they do have these chats, so intent on one side seems pretty obvious.
The only way out of this mess for the defendant is likely to be for their lawyers to find the same level of intent on the other side – and for that they better hope that were not multiple buyers during that Singapore morning.