In 2001, Paul Walter joined UBS as a trader. He moved to the Bank of America Merrill Lynch (BAML) in 2013, and stopped working there in 2014. In November 2017, he was fined £60,000 by the FCA.

His offence was spoofing, a practice described in the MAR (Market Abuse), chapter of the FCA Handbook as

“…effecting transactions or orders to trade…which –

(a) give, or are likely to give a false or misleading impression as to the supply of, or demand for, or as to the price of one or more [qualifying investments] or

(b) secure the price of one or more such investments at an abnormal or artificial level.”

The FCA’s notice gives more detail.

“…on 11 instances during the Relevant Period, Mr Walter entered a series of quotes i.e. a bid and an offer quote, with high bid quotes that became Best Bid on the BrokerTec trading platform for the specific Dutch State Loan (DSL) he was bidding for, and worst offer. After some other market participants who were tracking his quotes had raised their own bids in response to his Best Bid, Mr Walter sold into the bids of other market participants and then cancelled his own quote. In doing so, on each instance he sold the DSL, he sold at a higher price than he would have secured at that time, had he not posted a series of misleading Best Bid quotes and then sold through his own bid.”

The FCA explained that Walter knew trading algorithms used by other market participants followed the Best Bid and Best Offer. The effect was that their users ended up buying DSLs at a higher price than they would otherwise have done, and sell at a lower price than they would otherwise have done.

Reasonably, the platform received complaints from other market participants. A profit of EUR 22,000 over two months was directly attributed to the strategy. He was given a chance to mend his ways when BrokerTec rang him to discuss his behaviour. He didn’t.

The embarrassing fact for BAML appears to be that its own trade surveillance team didn’t identify the behaviour.  Here’s a typical sequence of events:

  1. Best Bid at €143.209 in a size of 2 million.
  2. Firm A’s Best Bid at €143,193 in a size of 3 million (second place in order book).
  3. 09:57:57 Walter enters a bid for 2 million at €143,247 which becomes Best Bid.
  4. Firm A automatically improves its bid by 0.042 from €143,193 to €143,235 for 3 million, and maintains its second position in the order book.
  5. 09:58:00 With his bid in first position on the order book, Walter enters an order to sell up to 15 million at a price of €143,229 or better.
  6. Firm A buys 3 million at €143,235.
  7. 1½ seconds after the trade was executed, Walter cancels his quote.
  8. EUR 940 excess profit generated from the difference between the Best Bid before Walter’s manipulation, and the sale price achieved.

Walter keyed in quotes in the smallest size permissible (2 million), to minimise the downside in the event one of his quotes was accepted.  He executed trades on the other side in larger sums, once his Best Bid or Best Offer had been followed by others and then deleted his own quote.

It was very much the responsibility of BAML’s trade surveillance team to spot this asymmetric pattern, because the trading platform protected the identity of market participants from each other.

What were the other hallmarks of his behaviour? Same venue, same financial instrument, same trader, a small-sized offer to buy which raises prices, followed by a large sell order, no client orders matching his initial small quotes, nor position building of any sort.

A review of the way he ran his book showed that when he did acquire a large position from a BAML client, he wound that position down. The instances in which he sold to those tracking him coincided with when he was long on the relevant DSL.

A scan of Enforcd (using the market abuse and insider dealing theme) reveals much the same behaviour by Michael Coscia, (whose offence was manipulating the order book in commodities futures on ICE). Although his trading was algorithm driven, the strategy was identical:

“Mr Coscia’s trading programme was made of two “legs”. “Leg One” was to place a small order (typically 10 -20 lots) on the order book around the level of the best price i.e. the best bid or offer. Once the small order was in place (“resting”), several large orders (over 50 lots) were placed on the other side of the order book. The large orders were entered at progressively improving price levels. The sequence of events was timed to last a total of approximately 300 milliseconds after which the orders (small or large) would all be cancelled immediately and simultaneously if not previously executed… Other market participants were induced to place orders in the same direction, i.e. sell orders/offers, on the basis that the large sell orders represented a legitimate indication of seller interest.”

The Final Notice, and financial penalty of USD 903,176 was published in July 2013. If only Paul Walter had read it upon joining BAML then he could have learned from the lessons of the past.