The 68p lawsuit that threatened to upend the British bond market
In 2023, the Financial Conduct Authority set out to modernise the bond market. A noble ambition. But as many seasoned City execs will tell you, noble ambitions from regulators don’t always work out how they were intended.
The FCA proposed to introduce what’s known in industry jargon as a consolidated tape – a system which collates price and volume trade data in the market to make it more accessible. In its own words: “By providing a single, authoritative, complete and affordable source of market data, the CT should reduce trading costs, increase liquidity and allow investors to better assess their brokers’ execution quality.”
So far, so good. The regulator then decided it would outsource the consolidated tape to a third party provider via a procurement contract.
In its initial assessment, the FCA estimated the contract value at just shy of £30m and said it would award the contract via a reverse auction, in which whoever offered the lowest fee would win, using an online service called WebBidder.
But the moment the auction began, it quickly became clear the estimate was way off. At the first round on 4 August, the opening bid was £1,209.
Going once, going twice
The bidding continued, and by the 14th of August, the price had already sunk to £100.
On and on the bidding went and by the 54th (!) round, on 22 August, the price had tumbled further still, hitting just 68p.
That was where problems began. According to Ediphy, the bid it submitted wasn’t properly recorded. In a panic, the firm picked up the phone to the FCA to complain that there was a technical issue and they wanted to keep bidding.
But then a notification came: “Thank you for participating in the FCA UK Bond CTP eAuction. The bidding has now concluded.” They were out of the race.
Not long after, the FCA confirmed that another competitor, Etrading, had been awarded the contract. Ediphy were furious, and immediately wrote to FCA chief Nikhil Rathi, blasting that the process was “demonstrably and fatally flawed and unfair.”
The company has since begun a lawsuit over the contract award, in which it alleges that WebBidder’s software is “not fit for purpose.”
On top of that, Ediphy alleges that the regulator failed to deal with a conflict of interest relating to the contract. After it was awarded, Etrading’s chief product officer joined the board of…the FCA (there is no suggestion of wrongdoing by Etrading). The FCA rejects the perceived conflict because the exec joined the board after the contract was awarded.
Worse still for the FCA, the lawsuit automatically freezes the contract award until it is concluded, meaning there could be a delay of months before the contract can go ahead, or longer if it is determined that the process to award it was flawed and must be re-done.
The regulator yesterday confirmed it had submitted its formal defence to the legal challenge, in which it is understood to have petitioned the court to lift the contract freeze.
“We undertook a fair, competitive 2-stage process to ensure the provider could deliver a high-quality tape and the best value for money,” the FCA said in a statement, rejecting Ediphy’s characterisation of the contract award.
“It is in the public interest to deliver the important benefits of the tape as soon as possible.”
Dr Christian Koboldt, partner at WebBidder owner DotEcon, said: “We reject any claim or allegation that WebBidder is not fit for purpose.
“The platform has been used successfully to run numerous high-stakes auctions around the world. There is no evidence of any technical failure that would have prevented or hindered Ediphy from submitting its bid and the auction proceeded entirely in line with the auction rules.”
Resolution
But late last night, relief came for the FCA. Ediphy had agreed to the lifting of the automatic suspension of the procurement contract “to avoid further delays” and is now only in pursuit of damages.
In a statement, Ediphy chief Chris Murphy said: “We are clearing the path for the contract to be signed because the market needs certainty,” adding that the firm’s view of flaws in the procurement process was unchanged.
The move means Etrading will get the gig and the new system will be up and running pronto.
But jeopardy is not yet over for the FCA. In a rather high-stakes call, it had already fired the starting gun for the process to establish the same framework in the equity market, namely, the introduction of an equity consolidated tape.
It was not beyond the realms of possibility that a bad ruling could have upended the bond and equity tape procurement at the same time – not a good look.
We can only hope that this time round, the FCA will have learnt its lesson. If not, more 68p lawsuits could be around the corner.