The hymn of Axiom: failure to disclose in FX trades doesn't violate consumer protection law

Axiom Investment Advisors, LLC v. Deutsche Bank AG, 2017 WL 590320, No. 15 Civ. 9945 (S.D.N.Y. Feb. 13, 2017)

Deutsche Bank allegedly delayed execution of electronically matched trade orders in the foreign exchange (FX) market in order to benefit from market movements, known as “Last Look.”  Axiom sued for breach of contract, breach of the implied covenant of good faith and fair dealing, violations of N.Y. General Business Law §§ 349 and 350, and unjust enrichment.

The FX market is “the largest and most actively traded financial market in the world, with global trades averaging $5.3 trillion per day.” It mostly works through bilateral contracts, in which large banks such as Deutsche Bank represent the “sell side” and act as liquidity providers or market makers. Most FX trades occur on electronic trading platforms, with price and quantity data reflecting limit orders placed by liquidity providers.  This data stream is constantly updated—limit orders are filled or withdrawn within milliseconds.  Deutsche Bank trades on both single-dealer and multi-dealer platforms; on the latter, it’s only one of many liquidity providers.  Its single-dealer platform is called Autobahn, which claims to provide “competitive and reliable prices in over 200 currency pairs” with “dynamically priced executable streaming prices customized to suit each client’s requirements.”

Beginning in 2003, Deutsche Bank allegedly arranged for the matching algorithms used by Autobahn and other networks to include an unnecessary delay of anywhere from several hundred milliseconds to several seconds. During this time, Deutsche Bank monitored the market movement and if it moved against Deutsche Bank too much, Deutsche Bank would either reject the matched order or execute it at the new price. Deutsche Bank allegedly never directly disclosed Last Look to buy-side FX market participants. The process of matching orders is undisclosed to market participants; “buy-side market participants have no way of knowing whether any of their trades were delayed by Deutsche Bank’s use of Last Look or whether Deutsche Bank reneged on any of their matched orders.” Although reports about this practice surfaced “several years ago,” the liquidity providers “said at that time that Last Look was necessary to ensure that multiple trades were not executed on a single order,” which the complaint alleged was pretextual and misleading.

The complaint stated a claim for breach of contract arising out of transactions on Autobahn because the contract between the parties didn’t unambiguously permit Last Look; so too with transactions on other networks (for which there was no express contract between the parties).  The claim for breach of the implied covenant of good faith and fair dealing was dismissed as redundant.  The court dismissed the claim for unjust enrichment relating to the Autobahn transactions (because of the existence of the contract) but not for the multi-dealer transactions.

The state consumer protection claims under N.Y. Gen. Bus. Law §§ 349, 350 were dismissed because FX trading wasn’t consumer-oriented conduct.  Conduct is consumer oriented if it has “a broader impact on consumers at large,” and consumers are “those who purchase goods and services for personal, family or household use.” “Transactions between businesses or sophisticated parties that do not affect average consumers do not constitute consumer-oriented conduct.” Similar to securities, FX is traded “as investments, not as goods to be ‘consumed’ or ‘used.’ ”