More than a few people have told me in recent weeks that they see the trial (and now appeal) of Mark Johnson, and that of the Cartel threesome – which started this week in New York – as being inextricably linked. You all know what’s coming…I don’t agree. In fact I think there are some fundamental differences that mean this week’s trial – complex as it is – cannot be seen through the same lens.

First things, first, I still believe that these traders were put in harm’s way by their institutions’ insistence on winning Fix business that could not possibly be executed according to the rulebook – such as it was. Secondly, I think they were incredibly arrogant (some might say stupid) to have a chat room called The Cartel – again though, one has to question why someone in management didn’t raise the issue during its existence?

To align this trial with that of Johnson is wrong, however, because of the nature of the alleged actions. Johnson’s case is about his handling of a single trade; the Cartel’s is about a systematic approach to handling multiple orders at the Fix (and I might as well point out now – to groans from the readership I know – that the Fix is at the centre of both these trials thanks to its then-outdated mechanism).

Another difference is how the US government found something deeply suspicious in Johnson’s use of code words – even though it was explained that they were to protect the anonymity of the customer’s order – whereas in the Cartel trial, the prosecution seems very concerned about how the information was shared. In one trial, protecting the details of the order was suspicious, in the other, sharing details of an order was…suspicious! Welcome to 2018, where everything is wrong.

Obviously another common theme is that of pre-hedging, however I am less convinced the Cartel case is about that, although it needs to be stressed that the only way these traders would have been able to manage the risk they were given was by pre-hedging. To repeat, ad nauseam, you can’t shift billions of dollars in the FX market in a one-minute window.

This case, however, could be more about the collusion than the pre-hedging – and again this is a critical difference to the Johnson trial. Yes, pre-hedging is the only way to handle this risk, but sharing details outside the institution and building a larger order for one member of the chat room to execute, with the knowledge and support of the others, steps into dangerous ground legally – which may be what the US government is going to argue.

Actually it will be interesting to see if the prosecution has learned anything from the Johnson case in terms of its “expert” evidence. This may sound strange, but I feel the US government won a conviction against Johnson in spite of the evidence of its experts which was, quite frankly, as anyone involved in the industry day-to-day will tell you, nonsensical at times (I would also point out that showing up this evidence could, hopefully, lead to a successful appeal by Johnson).

One of the “expert” solutions for handling order flow of the type handled by the Cartel was for the dealer just to assume the risk at the Fix and then hedge it out afterwards. It’s a “solution” that quite frankly beggars belief. They actually think that a financial institution would assume billions of dollars of risk, at a rate they did not quote, at a time of day when liquidity falls off a cliff as Europe goes home, London winds down and New York pulls its head in? 

No doubt the same people who think this is a good idea no doubt want our financial institutions to be safer and less riskier? And that shareholder value should be protected? It’s idiotic and signals someone out of touch with reality, and if the government realises that and does not play the same card, can this been seen as a sign it acknowledges the shortcomings of its evidence in the Johnson trial? We shall see.

No doubt the defence teams in the Cartel trial will argue that the transcriptions and chat messages are cherry-picked by the prosecution – they will be, that is their job after all to make this look as bad as possible. The defence will also, no doubt, argue, that the style of execution and order handling used by the chat room members was anything but illegal; if it was, surely it would not have led to losses the way it did on multiple occasions? After all, the FX market may not be able to handle huge orders in very short time horizons, but it remains pretty sizeable, and as such trying to bully it in one direction or another is a risky undertaking.

There is also a question to be asked about why they gave their orders to one player and let him ram the order through the Fix? If the intent was to force the market in one direction, then three players hitting the market for size would have looked just as aggressive as one – in fact it could be argued it would have more market impact. So if the intent was the force the market one way or the other it could be argued they went about it the wrong way – or had no intention of doing so in the first place.

So the arguments, while they will have echoes of the Johnson case, are likely to be radically different, certainly on the defence side. For the prosecution, it will be interesting to see if they “major” the collusion angle, or the front running – if it is the latter, without evidence of the dealers taking personal positions (not pre-hedging) ahead of the Fix I fear we will have to put up with much more illogical and ill-thought-out evidence that betrays a lack of understanding as to how an OTC market works.

If the prosecution leads with the collusion angle that is, frankly, potentially less damaging to the industry because if there is one aspect of this whole sorry mess that has been put to bed it is the collusion and chat room piece. Surveillance systems operate (too zealously at times) and no-one has the excuse they didn’t know about what should and shouldn’t be said, or how information should be protected – the Global Code put paid to that. 

If this case does become one centred on charges of collusion then for the FX industry, its completion may bring a little closure, for this is really where it all started. The scandal that has claimed so much collateral damage is all about the actions of this small group of men.

If it becomes another showpiece for the US government’s lack of understanding over how to handle large risk in the FX market, however, I fear we may face years more scrutiny over a solid and prudent risk management practice. My eyes, especially, will be trained on that court room in New York to see which way it goes and I hope, eventually, we will be able to close the door on a very sad and difficult chapter in this proud industry’s story.

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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