Brattle Principals Paul Hinton and George Oldfield have co-authored an article on Law360 discussing the use of criminal prosecution to police trading practices in institutional financial markets.

The authors analyze liquidity and market structure in the context of the recent case involving HSBC’s former foreign exchange executive, Mark Johnson, who was convicted for misappropriating inside information in a large foreign exchange (FX) trade. At issue in this case was the practice of “pre-hedging,” or positioning in advance of an anticipated block order to manage liquidity in lightly-regulated FX markets. In the largely unregulated FX market, the expectations of the client and obligations of the dealer to provide best execution were not explicitly defined, even though HSBC was retained under contract to execute its FX strategy.

The authors also outline several potential consequences of Johnson’s criminal conviction, including the reduction in liquidity for block trades in the FX and other over-the-counter (OTC) markets, as well as the adoption of more explicit contract terms for block trade positioning, pricing, risk bearing, and compensation.

The article, “The Johnson Conviction and Fallout for Forex Market,” was co-written by Andrew Newman, a former FX executive, and can be read in its entirety using the link below.

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