Updated Currenex Lawsuit Highlights HC Tech “Spy” Access, “Secret Rules”

The lawsuit brought against Currenex, State Street, Goldman Sachs and HC Tech has been updated, with the plaintiffs, now joined by XTX Markets, citing “secret” rules that allowed the platform to provide undisclosed privileges to certain customers. It also alleges that HC Tech was provided with administrative access that allowed it to see all orders on the platform and the participants behind them.

The lawsuit now argues, “This case is not about whether trading platforms must use FIFO, or any other particular matching logic, to break ties. Rather, this case is about the illegality of platform operators implementing practices that were (a) highly material, (b) adverse to the interests of most users, (c) shocking departures from industry norms, and (d) never disclosed.”

It claims the “secret” rules, gave a “narrow subset of participants unfair bidding advantages” in what was tantamount to an auction process. These rules, and the advantages they gave the defendants, were neither revealed to the plaintiffs and class members, the lawsuit states, nor were they reasonably expected.

“Chief among these was a secret, never-before-seen rule for breaking “tie” bids,” the lawsuit states. “In case of a tie, Currenex operated under secret agreements with a few privileged customers, providing that their bids would always be declared the winner. Currenex also provided these same privileges to its own parent company, State Street, which operated as one of the largest liquidity providers on the platform.”

One of the key aspects of the initial lawsuit was whether or not Currenex had, or even had to, disclose the absence of a “first-in, first-out” (FIFO) matching policy on the platform, but perhaps even more potentially damning is the claim in the updated lawsuit, that Currenex also gave at least one customer, named as HC Tech, administrative level access to the platform, thus allowing it to view all orders placed on the platform. Clearly if one participant has a view of all orders, a significant advantage accrues, in this case to a firm that was, the lawsuit states, seeing about 10% of all business on the platform.

Citing a “platform employee” the lawsuit says that the preferential system with HC Tech was carried out at one point at least by Currenex simply giving the prop trading firm the platform’s head of sales Russell Sears’ personal API log-in username and password. “As a result, HC Tech “basically saw everything.” This may have even included access to trader codes that would have allowed HC Tech to determine who was behind each quote,” the lawsuit claims.

Labelling this as a “shocking breach of trust” the plaintiffs argue they only discovered this mechanism by way of their, or counsel’s investigations.

The lawsuit argues that the rule regarding a “tie” between competing bids and offers, normally FIFO, should be disclosed as per industry standards, but that while Currenex and State Street purported to be following the industry norm that additional rules would be disclosed – the lawsuit cites its website in 2005 as stating “Limit Orders are filled automatically by the first counterparty bank to stream a price that matches the order” – it was not doing so. This wording, or something similar, was on the website until 2015, the lawsuit says.

In 2015, the lawsuit further alleges, Currenex disclosed a change to the platform’s rules, prioritising firm bids and offers, i.e. not subject to last look, but was not actually following those rules, rather it had operating according to the aforementioned “secret” rules. This was reaffirmed, the lawsuit states, in a 2017 update to its disclosures.

Noting that the defendants would have their orders jump in line where necessary, the plaintiffs argue “Not only was this rule unfair, it was blatantly anticompetitive. As the beneficiaries of this secret rule—select Trading Defendants win every tie—the Trading Defendants had no incentive to compete on either on price or the firmness of their quotes. “Instead, the Trading Defendants could simply sit back, watch the screen, and then swoop in at the last moment and grab any trade they wanted without ever having to enter a competing bid or offer,” it continues. “As a result, prices became artificial, and Plaintiffs and class members paid too much when buying, received too little when selling, and incurred increased execution costs.”

Regarding the alleged access provided to HC Tech, the plaintiffs argue “it is difficult to overstate the harm caused” by this access, adding, “for instance, HC Tech could see its rivals’ potential and actual trading patterns – which in many cases were the result of proprietary algorithmic trading systems. HC Tech could even see the “hidden” orders, allowing it to trade out ahead and make guaranteed profits, at the expense of other users.”

As was suspected at the time of the initial lawsuit, the information in it was sourced from a (presumably former) employee of Currenex, however the updated lawsuit also references documentation with XTX Markets signed by David Newns, then head of Currenex and now head of digital assets group Six, and Beverly Doherty, head of North America for Global Link, the umbrella business of State Street’s trading platforms and cites them as evidence State Street was fully aware of what was going on and was, as the original lawsuit stated, one of the privileged trading firms.

There is little doubt that the class action has received a considerable boost from the support of XTX, rather than it being led by two now defunct trading firms. XTX also seems to have brought some evidence to the table regarding its own correspondence with Currenex, not least one occasion when it emailed to ask if there was anything it could do, or was missing, that could help it do more business on the platform.

The updated lawsuit says that questions in a May 2016 email included asking for information on the typical Currenex liquidity provider response times, whether Currenex offered “market maker rebate programs,” and about “unknown unknowns…is there anything we are missing?”

XTX says in the lawsuit that it stated it understood, based on the 2015 Revised Disclosures, that Currenex switched “from FIFO to prioritising firm orders” in September 2015, and specifically asked if there were other features the engine also considered?

“In response,” the lawsuit states. “Currenex simply pointed XTX to the Disclosures discussed above. This led XTX to again review the Disclosures discussed above. Currenex also tried to shift blame to XTX itself, saying XTX should be using a different way of interfacing with Currenex’s systems if it wanted to perform better.

“Currenex’s responses to XTX’s inquiries were false and misleading and were intended to help conceal the fact that Currenex’s secret tiebreaking rule, discussed below, was the real reason XTX was not more successful on the Platform,” the lawsuit alleges.

While there are new allegations and detail in the updated lawsuit, the original claims still represent the core of the case – that Currenex negotiated the special deals and even ran tests (allegedly under the supervision of Newns according to the lawsuit) to monitor the impact of the scheme.

The new document, also refers to the consequences of the original filing, which was followed, it states, by Newns’ departure some eight days later; a recent rebranding of Currenex under the GlobalLink FX banner; and calls from senior Currenex staff to major clients, including XTX, to “try to convince them to keep using the platform, even while refusing to comment on the specific allegations”.

There was a school of thought after the original filing that the case would either be settled, or the plantiffs “strung out until they run out of money” as one industry source told The Full FX at the time, this now seems to be out of the question. This means that, once again, the FX industry will be in the legal spotlight, with the resulting headlines.

As was the case with the original filing, the crux of the matter will be whether or not the alleged mechanism was deliberately not disclosed (and actively hidden), however the allegations regarding administrative access to HC Tech have raised the stakes considerably. As the lawsuit argues, “Not only did Currenex’s representations hide the scheme, but Currenex’s behaviour was so shocking, unique, and out of step with industry norms, that Plaintiffs could not have reasonably anticipated any ECN operator would have acted this way.”

It will probably be for yet another New York jury to decide whether they were or not.