The Last Look…

Like many people, I was concerned when I first read the allegations – which it is important to stress, remain unproven at this point – of Currenex providing privileged access to order for a small number of firms, however there was a school of thought in the industry, that it was merely a question of a lack of disclosure. I disagree with such a notion – I believe that publishing rules and adhering to them is an absolute must – but the latest allegations  about the platform providing one firm with the ability to see the whole book, raises the ante substantially.

Although the lawsuit focuses largely on an era – and this is a familiar story in FX over recent years – before the FX Global Code was published, what concerns me is how, if true, the allegations indicate a lack of fairness and transparency when dealing with market participants, something that is addressed by a core aspect of the Code, information sharing.

You can argue (unconvincingly in my view) that the traders in the chat rooms were merely attempting to reduce the market impact of their 4pm Fix business when they shared information about customer orders. In reality, thanks largely to direction from senior management, they were information seeking – and to get information, you have to give a little.

Equally, there is no doubt, talking to traders in the game at the time (and since), that some salespeople were quite content to share details of a bank’s order book with certain clients – indeed at one time it is likely it was a prerequisite for getting the business.

Both were wrong, but they gave a window onto one institution’s business, or, in the case of the Fix, one (important) trading period in the market. What we are reading now, is that Currenex allegedly provided HC Tech with an API log in that would allow the firm to see all orders on the platform. Not only would this help with the “jump-in-line” mechanism that is alleged to have been in place, but it could, conceivably, help a participant access “tag” identities, and build up a picture of those firms’ trading activities. It’s bad enough that a “liquidity provider” can sniff out larger orders by trading in very small amounts, if such a system existed, they wouldn’t even need to do that.

Talking to people in the industry, whether proven or not, the claims are already damaging Currenex’ business, notwithstanding the rebranding under the Global Link FX umbrella. Several liquidity consumers have told me liquidity levels have dropped, and more than one LP is adamant, in private at least, that they will not stream to the platform.

In this day and age, few bank prime brokers want to be associated with a firm under a cloud, so what would the firm’s PB(s) think (and do) in the case of a guilty verdict?

If this is indeed a reflection of the wider picture, then State Street needs to get this matter dealt with and settled quickly if it is to save the platform. Generally speaking, the people named in the lawsuit are no longer at the firm and a cultural shift has already taken place, and that is OK, but if the verdict goes against the platform then it’s hard to see a way back.

At the time of the original lawsuit, there were suggestions that State Street would settle out of court – after all, the class action was led by two now defunct trading firms, neither of whom was widely known. Some even suggested the bank could “out-last” the plaintiffs given its spending power. That changed with the addition of XTX Markets as an extra lead on the action.

Now, not only does the platform have to face allegations associated with the name of one of the bigger ECN trading firms in the FX industry, but that firm has deep pockets – and, as has been the case pretty much since formation, a deep desire to do what it sees as “the right thing”. Of course, in the interests of fairness, I must mention the cynical view from some in the industry that XTX would benefit from the under-mining of a rival firm, but surely this is about more than that? If proven these practices directly damaged XTX and others in addition to, and this harks back to its desire to drive ethical standards in the industry, being unfair and unethical.

Moving on, there is also the question of what this does for those firms (and individuals) named in the lawsuit. As I understand it, the individuals are not charged, it remains the institutions, but as I noted at the time of the original lawsuit, the alleged actions of the individuals are at the heart of the claims.

It is notable that the lawsuit names individuals with direct connections to Currenex, but, for example, no one is named as having agreed to the activity on behalf of State Street’s trading business. At Goldman the lawsuit names Rick Schonberg as signing the agreement, inferring that the fact that he went onto work at Currenex shows he was complicit in the alleged behaviour, but at State Street? No-one. Rationally, if one accepts the argument that the trading firms were merely looking after their own business and saw responsibility for disclosure being with the platform, one also wonders whether that argument will stand up to legal scrutiny. After all, in the case of Schonberg, what is to be gained from signing a deal that benefits one party, and then leaving for the other?

Talking to people in the industry about the likely impact on HC Tech, the view varies depending upon the relationship with the firm, but all agree that the lawsuit is pushing the direct personnel connection in the form of Sean Gilman and Cary Rosenwald, both of whom are alleged to have been complicit in creating the mechanism and then adopting it when they left Currenex for HC Tech.

Very broadly, those benefiting from a relationship with HC Tech (generally in the trading facilitation business) tend to the view that with a few sacrificial lambs the storm will pass. Others, especially competitors, are pushing the “trust” angle. Naturally it depends upon any verdict if the case gets to court, but the firm is undoubtedly facing the risk of serious reputational damage, and as someone pointed out to me after the latest allegations, this could spill over into their ability to access the market. In this day and age, few bank prime brokers want to be associated with a firm under a cloud, so what would the firm’s PB(s) think (and do) in the case of a guilty verdict?

As far as Currenex is concerned, if State Street is forced to sell, this case takes on existential status

Certainly, the ante has been upped when it comes to HC Tech. At the time of the original case, I argued that the firms named in the case could possibly defend themselves, if it came to it, by arguing they thought what was happening was within the platform’s rules, and as such they signed the deal. That argument is not going to hold any water when it comes to defending allegations of having administrative access to the platform. Aside from the Code, there are confidentiality and competition laws around business operations that are unlikely to stand up to scrutiny when it comes to two ostensibly independent firms sharing what should be private information of third parties.

There is, therefore, a lot riding on this class action for Currenex and HC Tech in particular. Were there to be a guilty verdict the two named banks could probably ride out the reputational storm, albeit with some damage to their FX business, but, in FX terms at least, can the same be said about the prop trading firm? At senior levels of State Street, also, there must be deep unhappiness at the allegations and the stain it threatens on a business – FX trading services – that provided over $1.2 billion in revenue in 2021.

I recall writing when at Profit & Loss, how industry sources were telling me questions were being asked of State Street around 2013 regarding its ownership of Currenex and FX Connect. These questions came, I was told, from the New York Fed. If – and it remains an ‘if’ – there is a guilty verdict in this case (frankly, even if there is an out-of-court settlement), then these questions will be asked again, with renewed vigour. There is even the chance that US regulators, fed up with more allegations against State Street’s platform business (following a settlement over allegations of improper activity on its GovEx platform in 2017) may decide that the bank is not a ‘fit and proper’ owner of such a business due to what could be viewed as an inability to effectively manage and control it, and force a sale.

The big problem there is, at least when it comes to Currenex, a buyer is unlikely to be found – therefore, as far as that platform is concerned, this case takes on existential status.

colin@thefullfx.com

@colinlambertFX