David Corker, Corker Binning Solicitors
"The defence case that the accused's trading strategy was legitimate risk management designed to help fill the client’s order would have been unassailable but for the contemporaneous recordings and emails. The accused used pre-hedging, which is a common means to reduce risk in a volatile FX market. Being able to differentiate this benign measure from front running, which is designed to harm the client and enrich the bank, is usually impossible outside of egregious examples.
Johnson’s downfall was that he revealed his malign intention, to front-run the client order, and so confessed to the crime. Moreover, he unwisely revealed this on a bank communications network, which he should have remembered would be stored and looked at if the client complained. Perhaps he thought his real strategy to be so cleverly disguised and executed that no one would detect it.
This case shows the benefit of making banks exercise surveillance or vigilance over their traders and emphasises the need for ongoing training of traders as to what are legitimate trading strategies. The legal distinction between pre-hedging and front running is vast, yet for a trader they might seem two sides of the same coin.
This was a single transaction case and so relatively easy to prosecute. Next June the much more ambitious DoJ prosecution of three London-based FX traders is due to commence. The chief allegation is that they were part of a cartel. Proving that will be a much tougher task for the prosecution."