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19 September 2017
In Shurbanova v Forex Capital Markets Limited ( EWHC 2133 (QB)) the High Court upheld the contractual right of an online foreign exchange retail trading broker to revoke trades entered into by a customer, on the basis that the customer had breached a contractual duty not to trade abusively. The court held that the broker's right to revoke was not subject to a Braganza duty to exercise it in a way which was not arbitrary, capricious or irrational in a public law sense.
The defendant, an online foreign exchange and commodities broker, operated a dealing desk retail platform (DD). The DD had two particular features:
It was possible for customers to place trades manually or to connect their own trading software to the DD to trade electronically according to pre-set criteria.
The claimant was an individual who had opened an account with the defendant.
The defendant's terms of business constituted the contract between the parties.
Clause 27.1 (headed "Gaming and/or Abusive Strategies") read as follows:
"Internet, connectivity delays and errors sometimes create a situation where the price displayed on the Trading Facility does not accurately reflect the market rates. The concept of gaming and/or abusing the system cannot exist in an [over-the-counter] market where the customer is buying or selling directly from the Principal. The Company does not permit the deliberate practice of gaming and/or use of abusive trading practices on the Trading Facility. Transactions that rely on price latency opportunities may be revoked, without prior notice. The Company reserves the right to make the necessary corrections or adjustments on the Account involved without prior notice. Accounts that rely on gaming and/or abusive strategies may at the Company's sole discretion be subject to intervention by the Company and the Company's approval of any Orders. Any dispute arising from such quoting or execution errors will be resolved by the Company in its sole and absolute discretion."
Clause 26.1 read as follows:
"a Manifest Error means a manifest or obvious misquote by the Company or any Market, exchange price providing bank, information source, commentator or official on whom the Company reasonably relies… When determining whether a situation amounts to a Manifest Error the Company may take into account all information in its possession including without limitation information concerning all relevant market conditions and any error in or lack of clarity of any information source or announcement."
Clause 26.2 read as follows:
"The Company will, when making a determination as to whether a situation amounts to a Manifest Error, act fairly towards the client… The Company reserves the right, without prior notice, to:
(a) amend the details of such a Transaction to reflect what the company considers in its discretion acting in good faith to be the correct fare terms of such Transaction absent such Manifest Error(s);
(b) if the Client does not promptly agree to any amendment made under clause 26.2 herein the Company may void from its inception any Transaction resulting from or deriving from a Manifest Error; and/or
(c) refrain from taking any action at all to amend the details of such a Transaction or void such a transaction."
Under the contract the claimant also agreed:
On November 8 2013 the claimant made $463,410 on 43 trades, committing $130 million, which she had placed on the DD to sell gold and buy US dollars. The trades were made within 31 seconds following the 8:30am release of a monthly US Non-Farm Payroll Data (NFPD) announcement. After the announcement, which was positive, the value of the US dollar rose and the value of gold declined.
However, later the same day the defendant revoked the claimant's trades. The claimant's husband had previously been restricted from using the defendant's trading platform because he was suspected of abusive trading (ie, 'gaming') by price latency – that is, making trades triggered automatically following the outcome of a particular news event so quickly that the quoted price on the DD does not have time to react. As the court noted, such trades were regarded as abusive because they were based not on a prior prediction of the outcome of the particular news event, but rather on the known outcome of the event, with a profit made because of the time lag in the quoted price on the DD.
The claimant argued that the revocation of the trades was in breach of contract.
At trial the defendant ultimately relied on arguments that:
In response to these arguments, the claimant contended that:
As to whether there had been a manifest error entitling revocation of the contract, the court held as follows:
As to the right of the defendant to revoke the contract because there had been abusive trading, the court held as follows:
As to whether there had been abusive trading, permitting the exercise of the Clause 27.1 right to revoke, the court found that "what happened here was classic abusive trading":
"The whole point is that taking advantage of the price latency inherent in the 'throttled' price offered on DD was literally an abuse of the system in place. It was not intended that users of the DD should act as professionals and make risk-free profits, based not on intelligent predictions of market movements but purely on the inherent time-lag before the DD prices accurately reflected the news event."
Accordingly, the court dismissed the claim.
The decision will be read carefully by participants in foreign exchange trading, in particular those trading on online trading platforms for retail investors, which throttle their prices. The court's decision makes clear that the execution of trades made immediately after (rather than before) news events, by using high-speed news feeds, may constitute abusive trading which may not be permitted under the terms of business of such retail trading platforms.
The court's finding that there was no Braganza duty in relation to the defendant's contractual right to revoke the contract because of abusive trading will also be of interest. This finding was on the basis that the decision in question was simply a decision as to whether the defendant wished to exercise an absolute contractual right, rather than to make an assessment or judgement as to a variety of outcomes.
A few points are worth noting in terms of litigation strategy and tactics:
For further information on this topic please contact Alan Williams or Parham Kouchikali at RPC by telephone (+44 20 3060 6000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
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