Regular readers of CFDs Weekly may recall the last chapter of the tumultuous IS Prime – ThinkMarkets court drama from a couple of months ago.
It’s a case that some are describing as the Johnny Depp – Amber Heard saga of the CFD world, filled with all the tension of that “you can’t handle the truth” movie with Jack Nicholson and Tom Cruise.
It all started when IS Prime, a prime-of-prime broker, took CFD provider ThinkMarkets to court for breach of contract, demanding $15m in compensation. ThinkMarkets, according to ISP, reneged on an exclusivity agreement the pair signed back in 2017.
That agreement meant ISP was supposed to be ThinkMarkets’ sole execution venue for any order flow it didn’t warehouse.
But according to ISP, ThinkMarkets didn’t adhere to that agreement, either for spot FX or index swaps.
Along the way we also learnt that someone at ThinkMarkets may have written fake posts on company review site Glassdoor about ISP by pretending to be an ex-employee. These reviews are funny because:
- They were ‘written’ by someone in Michigan, even though ISP doesn’t have an office there (or anywhere else in the US).
- They were written by a ‘Head of Trading’ even though ISP doesn’t have a Head of Trading.
The latest twist in the proceedings comes from several counterclaims made by ThinkMarkets against ISP.
The crux of those counterclaims is the argument that ISP was not providing the pricing it got from its ‘Tier-1’ liquidity providers to ThinkMarkets. Instead, ISP was sending order flow to ISFE 21 – a Caymans Island entity that may be tied to ISAM Capital Markets, the systematic hedge fund group that owns ISP.
ISFE 21 was internalising flow or adding a markup to the pricing it was getting from its liquidity providers.
ThinkMarkets main claims were that:
- It was supposed to be getting the same pricing that ISP was getting from its liquidity providers.
- ISP was profiting from any order flow it got sent, either through ISFE 21’s markups or internalising of trades, which it wasn’t supposed to.
- ThinkMarkets’ own b-book trades weren’t as profitable as they could be because of the poor pricing they received from ISP. Sophisticated traders were also able to arbitrage them as a result of this poor pricing.
This all raises some intriguing points.
Apparently, in the original agreement they made, ISP said they’d pass on the raw pricing they got from their liquidity providers to ThinkMarkets. It is hard to understand how this would not have some sort of clause attached to it. The reason for this is that, if they weren’t widening the spread, they wouldn’t be making any money.
And indeed, there was a part of the contract that said ISP could…
“accept from third parties (and not be liable to account to [ThinkMarkets] for) benefits, commissions or remuneration paid or received as a result of Transactions carried out by [ThinkMarkets].”
But ThinkMarkets real claim was that this process was costing them money. This also doesn’t make much sense as it pertains to A book trades that they passed through to ISP.
As the judge overseeing the case noted, for ThinkMarkets to have a meaningful argument, they’d have to show that ISP made money at their expense. If you are A booking trades this wouldn’t happen because the ‘costs’ – in this case the difference between the liquidity provider’s price and ISP’s – would just be passed on to customers.
So even if ISP was adding a markup, that markup was paid for by ThinkMarkets’ customers, not ThinkMarkets. Unsurprisingly then, ThinkMarkets isn’t going to be getting any money back from ISP on the A book trade counterclaim.
The B book counterclaim is more interesting.
One point that ISP’s lawyers made here is that ThinkMarkets wasn’t allowed to use the price feed it got to B book trades. Of course, they also sued ThinkMarkets for not trading with them, even though they had the exclusivity agreement. ‘You have to trade with us but you can’t use our price feed’ is not a great argument.
A couple of ThinkMarkets’ claims were dubious as well.
For regular B book trades, they would – as the judge pointed out – presumably have made more money from wider spreads than they would if they had raw pricing. Nothing in the court documents suggests this wasn’t the case.
The other point which I found funny is that all of ThinkMarkets’ claims that they lost money from traders arbitraging them – because of the allegedly poor pricing they got from ISP – are prefaced with ‘legitimate’ (ie. it always says ‘legitimate arbitrage’).
Although this isn’t mentioned in the court documents, this must be because ThinkMarkets…does not allow its clients to arbitrage them? Their own Terms & Conditions client agreement explicitly prohibits it, stating:
“ThinkMarkets does not permit the practice of arbitrage, nor does it allow Client [sic] to take advantage of price latency.”
That being the case, you have to wonder what constitutes a ‘legitimate arbitrage’, as opposed to an ‘illegitimate arbitrage’ (which must logically exist).
I think it’s very likely that ThinkMarkets defines a ‘legitimate arbitrage’ as ‘a B book trade that ThinkMarkets lost money on when IS Prime was its liquidity provider’.
Unfortunately, no information is given in the court documents as to what these trades were or how they were carried out. The case appears to be ongoing as a result.
My guess, one informed by years of no legal training, is that nothing will come of it and ThinkMarkets won’t get any money from their counterclaims. In the meantime, the drama continues and the winners remain, as always, the very expensive legal teams hired by the two opposing sides.
Stuff that happened: