Printing, Spoofing, Calling, and Flying – Some of the Perils of Exchange Rate FX Option Broking

Posted: 14 Jan 2021 Last revised: 29 Jan 2021

See all articles by Rupert Macey-Dare

Rupert Macey-Dare

St Cross College - University of Oxford; Middle Temple; Minerva Chambers

Date Written: November 25, 2020


The recent UK Financial Conduct Authority FCA Final Notice 206018 of November 2020 imposed a fine of more than £3m against broking [Firm X] under FSMA 2000 s.206, for the abusive practice of so-called "printing" of fake trades in exchange rate (FX) options markets.

"Printing" according to the FCA "involves a broker communicating to clients that a trade has been executed at a specified price and/or size when no such trade has taken place" and hence "trading decisions which factor in this information, amongst other sources of data, may therefore be made on an incorrect view of the market."

To illustrate its case, the FCA provided 4 extremely high level examples of bogus "printed" Latin American (LATAM) exchange rate option trades, on 3 different dates in 2014, but without even specifying the particular exchange rate pairs, principal currency amounts, or purported transaction rates in its Final Notice.

Much more granular related information has however previously been detailed in the US Commodity Futures Trading Commission CTFC's published complaint of 28 September 2018 against [Firm X group] companies and others, alleging violations, inter alia, of the US Commodity Exchange Act, and which is still subject to ongoing US proceedings.

For example, the CTFC complaint alleged that: "Non-existent LATAM FX option trades flashed on New York-based clients’ [proprietary trading system] screens" and "In 2013 and 2014, this occurred over 200 times in LATAM currency pairs." including in USD v BRL (Brazilian Real) and USD v MXN (Mexican Peso) exchange rate options.

The CTFC complaint also alleged an extensive underlying practice of "Flying prices" (also “known in the industry as “spoofing” or “calling” a trade”) whereby: "From January 2013 through December 2014, [the group's] LATAM brokers in New York posted over 25,000 LATAM FX option bids and offers using a [specific] alias. The vast majority, if not all, of these prices were "flown" — they did not represent an actual bid or offer from a trading institution."

Similarly, the CTFC complaint alleged that "From approximately January 2014 to June 2014, a number of brokers from [the group's] London desk assisted in broking LATAM FX options for U.S.-based clients. During this period alone, [the group's] brokers posted over 6,900 LATAM FX option prices using a [specific] alias. The vast majority, if not all, of these prices were "flown" — they did not represent an actual bid or offer from a trading institution."

Furthermore, CTFC alleged that "From at least 2008 and continuing through at least 2015, [the group's] brokers flew bids and offers to clients over voice (phone), instant message (“IM”), and [the proprietary trading system] on a daily basis. These brokers would fly bids and offers on [the proprietary trading system] by posting them under one of the various [group] aliases ..... Because the platform was anonymous, [counterparty] traders could not tell the difference between bids and offers that were flown by the brokers and bids and offers that were made by an actual trading institution."

Any such practice of "flying prices" or "flying rates" on the broker screens would thus inevitably risk misleading specific market participants about the liquidity and concentration of trading interest, if any, at given levels in specific exchange rate option markets. This in turn could induce market participants to trade exchange rate options at times and rates when they otherwise would not, and so inevitably potentially sometimes also to incur losses that they otherwise would not.

Printed trades, according to the CTFC allegation, would occur when 2 bogus bid and offers were matched up together by brokers on the [the proprietary trading system] screen system, which then automatically signaled to counterparties using [the proprietary trading system] that genuine exchange rate option trades had occurred at these rates and times.

A related occurrence was the inadvertent acceptance of a single flying bid or flying offer price on [the proprietary trading system] by a counterparty. In such cases according to the CTFC allegation: "If a [group] broker got “paid” or “given” on a flown price, [then] the [group's] brokers would scramble to find an actual counterparty to step into the trade. If the broker was unable to find a counterparty he would... make up an excuse — to the trader to cover up the fact that the original bid or offer was not real." However even if a replacement real 2nd counterparty were found, this would still be later and ex post after the original actual trade time.

According to the CTFC allegation therefore, the practice of "printing" bogus trades, which was the subject of the FCA Final Notice, was actually much less extensive than the underlying practice of "flying" bogus prices or rates. This is not surprising since in traded derivatives markets, such as exchange traded futures, there can for some less liquid contracts and months be large numbers of indicative quoted price levels at any time amongst which a smaller flow of discrete actual trades occurs.

An added technicality in these examples above is that actual transaction prices were typically not being directly quoted and traded, but rather price-like "implied volatilities". This is because in a Black-Scholes type exchange rate option pricing model, the fair market value of a "call" on one currency in a currency pair and "put" on the other currency in the same currency pair, depends inter alia on: i) the original exchange rate level, ii) the option exchange rate strike level, iii) the time to maturity for the option, and iii) the implied volatility which is the key theoretical parameter estimated by traders. Other factors equal, as the implied volatility increases so the probability of any exchange rate moving by diffusion from its original level to the exchange rate option strike level before option maturity also increases and so the fair market option price also increases and can be backed out and calculated from the relevant equations accordingly.

It still remains to be seen what will be the final outcomes of CTFC's published complaint of 28 September 2018, which is currently just unproven assertion, but the FCA Final Notice 206018 of November 2020 is likely to strengthen CTFC's hand, and CTFC clearly believe that they have extensive evidence on their side.

Keywords: FX, Exchange Rate Option Pricing, Black-Scholes, Derivatives, FCA, Final Notice, CTFC

JEL Classification: G12, G15, G13, G14

Suggested Citation

Macey-Dare, Rupert, Printing, Spoofing, Calling, and Flying – Some of the Perils of Exchange Rate FX Option Broking (November 25, 2020). Available at SSRN:

Rupert Macey-Dare (Contact Author)

St Cross College - University of Oxford ( email )

Saint Giles
United Kingdom

Middle Temple

Middle Temple Lane
London, EC4Y 9AT
United Kingdom

Minerva Chambers

United Kingdom

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