In Shurbanova v Forex Capital Markets Limited ([2017] 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 allowed for small, cheap trades to be made (unlike some other platforms); and
- it 'throttled' the quoted unit price to react (relatively) more slowly to particular events than other non-retail platforms, allowing its retail customers to have (relatively) more time to think about making trades.
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:
- to act as principal and not as another person's agent or representative (Clause 23.1(g)); and
- to provide information to the defendant (whether in the account opening process or otherwise) which was true, accurate and not misleading in any material respect (Clause 23.1 (h)).
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:
- the trades were a "manifest error" within the meaning of Clause 26 of its terms of business, which it was entitled to correct, acting fairly, by amending the details of the transaction to revoke it; and
- further, or alternatively, the trades were abusive within the meaning of Clause 27.1 such that it was entitled to revoke them.
In response to these arguments, the claimant contended that:
- this was not a case of manifest error and in any event the defendant had not acted fairly; and
- this was not a case of abusive trading, but even if it were, the defendant's power to revoke the contract on this basis was subject to a contractual discretion which had not been properly exercised.
As to whether there had been a manifest error entitling revocation of the contract, the court held as follows:
- Under Clause 26.2 the defendant, acting fairly, had to determine whether there had been a manifest error (as defined in Clause 26.1). The Court found that the claimant's trades could not be described to be a manifest error by reference to price – the DD had operated, with prices changing relatively "slowly", as intended.
- Citing Braganza v BP Shipping ([2015] 1 WLR 1666), the court noted that if the defendant had not been obliged under the contract to act fairly in determining whether there had been a manifest error, there would in any event have been a duty to conduct the determination in a way which was not arbitrary, capricious or irrational in the public law sense.
As to the right of the defendant to revoke the contract because there had been abusive trading, the court held as follows:
- There was no express contractual obligation on the part of the defendant to determine, acting fairly, whether there had been abusive trading.
- The defendant's discretion under Clause 27.1 to revoke the contract for abusive trading was not subject to a Braganza duty. The exercise under Clause 27.1 was not an assessment or judgment being made by the defendant as to a variety of outcomes, but was simply a decision on whether it wished to exercise an absolute contractual right which had arisen (among other remedial options) to revoke the contract. Clause 27 was not a case of a contractual discretion attracting a Braganza duty, but was a pure contractual power.
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 claimant had used an electronic newsfeed – called a Forex News Gun (FNG) – to trigger trades on receipt of positive news in the NFPD announcement, rather than by making them prior to that announcement. According to the court, the trades were "not based on predictions and there was therefore no risk". The court noted that "in the end" the claimant's expert witness did "not really" dispute that there had been price latency trading. The court also accepted the evidence of the defendant's expert that another hallmark of abusive trading was the placing of many orders at smaller amounts rather than one large order, and found that a combination of many small orders placed within an extremely short time frame facilitated by the FNG software made the trades abusive.
- The court dismissed the claimant's argument that the trades could not be abusive when what was being taken advantage of was the defendant's own slower prices, which it had deliberately set up (to enable non-professional retail traders to trade more easily). The court noted that:
"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:
- The decision illustrates the importance of credible witness evidence. The court commented that the claimant's evidence was inconsistent and implausible, and found that she was an unreliable witness. The court was also critical of the other witness for the claimant, her son. The court commented on the absence of a key witness who might have assisted the court – the claimant's husband – and went on to find that the claimant had been a "cipher" for her husband and/or her son, and that her DD account had been set up in her name to get around the trading restrictions which the defendant had placed on her husband (and son).
- It is important to submit expert evidence which is on point. The court commented on the fact that the expertise of the claimant's expert was in regulation and compliance, rather than electronic trading. It preferred the evidence of the defendant's expert, who was an expert in electronic trading.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
For further information on this topic please contact Alan Williams or Parham Kouchikali at RPC by telephone (+44 20 3060 6000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.
