Fired Barclays FX Trader Gives Court First Look at Last Look
(Bloomberg) -- A fired Barclays Plc trader says there was nothing wrong with the way he applied a tool that blocked some unprofitable currency trades to all clients, rather than just “toxic" ones.
David Fotheringhame, a former managing director at the bank, is trying to get his job back in a London court, where he revealed details of how he used the so-called “last look” system. He lost his post in 2016 after the New York Department of Financial Services, which investigated Barclays’ use of the computer system, ordered the bank to dismiss him and pay $150 million.
Bank officials thought the order was unfair but signed it “on pain of losing their banking license and hence having to close their U.S. businesses,” he said in court filings. The probe held back a separate settlement between the bank and regulators over foreign exchange fixing, he said.
The lawsuit provides a glimpse into the bank’s use of last look as the tool faces increased scrutiny across the industry. Last month, central bankers and other market participants made their strongest statement yet against its use. Government officials and traders who comprise the Global Foreign Exchange Committee changed the voluntary FX Global Code to indicate that no one should "undertake trading activity that utilizes information from the client’s trade request during the last-look window."
The algorithm-based systems force banks’ computers to delay a fraction of a second after a hedge fund, a company or a broker requests a currency trade. If the market moves beyond a set threshold in that period, the trade gets rejected.
The system aims to defend banks against clients trying to profit from trading technologies that let them see market moves just before the bank does. Most rejections come when the market moves against the bank, Fotheringhame said, but since a 2014 tweak by Barclays, they can also get rejected if they’d have helped it.
A Barclays spokesman declined to comment.
The question at the heart of the dispute is whether Barclays should’ve used the trade-blocking trick only against clients who were taking advantage of advanced market knowledge -- or if it can be applied to everyone, so that even customers whose trades mostly go in the bank’s favor occasionally get their trade requests rejected when they go instantly against the bank.
“Your job was to look at the data, identify those clients who could be regarded as toxic because of their order flow and set last look accordingly,” the bank’s lawyer Andrew Blake told 46-year-old Fotheringhame in court on Thursday.
In a heated reply, Fotheringhame replied that Blake had “completely ignored that the system automatically will be gentle to gentle clients” -- those whose trades didn’t immediately look like they’d go against the bank.
Thresholds were “systematically and deliberately looser” for types of client that on average were less likely to be exploiting the bank, he said -- although even those customers sometimes had trades rejected when they went against the bank.
Fotheringhame, who was head of automated flow trading for electronic fixed-income, currencies and commodities, said using last look was a “long standing and very widespread practice in electronic trading” without which a bank would be “at a massive competitive disadvantage.” His case is scheduled to continue this week, and feature current and former bank executives.
Along with the changes to the non-binding FX Global Code, finance firms have gotten pushes from regulators to restrict use of last look. New York’s banking regulator pursued a case against Credit Suisse AG, which agreed in November to pay $135 million to resolve currency-manipulation allegations, including using last look to reject trades that looked like they’d go against the bank.
The New York DFS said Barclays had used last look as a “general filter” to reject orders that looked like they’d be unprofitable rather than a “defensive measure” against clients whose technology lets them detect market movements milliseconds before the bank and trade on that information.
But Fotheringhame said the system inherently targeted “toxic” counterparties because their trade requests were most often followed by a market move against the bank.
“To a large extent, I don’t have to do anything to last look to make it strict to high toxicity clients,” he said. Ninety-seven percent of rejected trades with U.S. clients were with hedge funds or brokers, he said, a sign that the bank wasn’t targeting ordinary corporate customers.
Judge Jill Brown, questioning Fotheringhame Thursday, asked why a “low-toxicity client should suffer any rejects at all given that the vast majority of their trades are beneficial to the bank.”
The former managing director said the bank had to protect its business.
“Why does the bank not allow them to trade for zero fees?” he said. “Clients would like us to send them a check every week for 100 pounds. What the client wants and what’s fair commercially are not the same thing at all.”
The DFS investigation into last look had held Barclays back in "closing out with regulators a separate, larger, long running investigation and series of settlements concerning FX fixings," Fotheringhame said in his court filings. The order to fire him came just months after the British bank pleaded guilty and paid $2.4 billion to global regulators, including New York’s DFS, to resolve a separate investigation into currency-trading manipulation.
Barclays’ case was “jam-packed full of fairy-tale presentations of the true commercial nature of their business,” Fotheringhame told the court.
“My ‘guilt’ in relation to last look was judged by the DFS and they in turn forced Barclays’ hand to dismiss me,” he said in court papers.
Fotheringhame had a “wholly misconceived” argument that the disciplinary process against him “was simply a fig-leaf” to implement the DFS order, the London-based bank said in its papers for the hearing. It said it fired him because of a “genuine belief” in his misconduct and after a thorough disciplinary procedure.
©2018 Bloomberg L.P.