Transmarket Trading Pty Limited v Sydney Futures Exchange Limited

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

GENERAL DIVISION NSD 1984 of 2007

Introduction 1 At 11.30am on Wednesday 25 July 2007 the Australian Bureau of Statistics released its Consumer Price Index (CPI) data for the June quarter of 2007. On this occasion the data indicated that the index had increased by 2.1% over the previous year and 1.2% over the previous quarter. This was somewhat stronger than market expectations and raised the potential for an increase in the Reserve Bank of Australia's official target cash rate. One of the markets whose expectations were exceeded was the futures market in debt instruments. That market may be briefly described thus: there are traded on the Sydney Futures Exchange futures contracts in which the underlying commodities are debt instruments such as 90 Day Bank Accepted Bills, 3 Year Australian Treasury Bonds and 10 Year Australian Treasury Bonds. These futures contracts have expiry dates of March, June, September and December. In these reasons, I will refer to the futures contract on a 90 Day Bank Accepted Bill expiring in December 2007 as, for example, the 90 Day December 07 contract. Likewise, it is convenient to refer to the futures contract expiring in March 2008 for 3 Year Australian Treasury Bonds as the 3 Year March 08 contract and the futures contract expiring in September 2008 for 10 Year Australian Treasury Bonds as the 10 Year September 08 contract. 2 This case concerns trading activity which took place in some of the markets for those contracts in the three minute period following the CPI announcement at 11.30am on 25 July 2007. Putting the matter generally the following occurred: (a) in the first 30 seconds the quoted price of the 90 Day September 07 contracts and the 3 Year September 07 fell 12 and 31 points respectively; (b) in the same period, the price of the 90 Day December 2007, 90 Day March 2008, 90 Day June 2008 and 90 Day September 2008 contracts rose by between 12 and 17 points; and (c) in the following three minutes, the positive price movements in the contracts referred to in (b) retraced their steps and fell by between five and 14 points. 3 It is unusual for the prices of futures contracts on different debt instruments to move in opposite directions on the announcement of CPI data. 4 The exchange on which the futures contracts in question were traded is conducted by the Sydney Futures Exchange Ltd which is the respondent to these proceedings. I will refer both to it and the exchange it operates as "the Exchange". The trading on the Exchange is regulated by "Operating Rules" which, on a day to day basis, are administered by one of its employees who is designated the "Trading Manager" and who is assisted in the discharge of that office by a number of senior and other staff. The trading on the Exchange takes place on an electronic platform known as SYCOM. SYCOM replaced, in 1999, a more colourful trading environment known as an "open outcry" market. Under the Operating Rules the Trading Manager has, in certain circumstances, the power to cancel trades which have taken place on SYCOM. He may do so, in his sole discretion, when in his opinion the trade was not in the best interests of a fair, orderly and transparent market. He must do so if what has occurred is an "error trade" taking place within the "market integrity range", a concept to which I return below. 5 On the day in question the Trading Manager was a Mr Raper. Like many others, no doubt, he was watching his SYCOM screen at 11.30am when the CPI announcement was pending. He and his staff observed the activity in the market for futures contracts already described. Mr Raper regarded it as being of concern and immediately began to investigate. At 11.38am all market participants were notified by email that the Exchange was investigating trades which had taken place between 11.30am and 11.33am. The Trading Manager and his staff then undertook an analysis of the trading which had occurred. For present purposes the result of that analysis may be summarised by observing that a fair price value for each contract was determined and then around each such value a range called the "market integrity range" was determined. Trades which were transacted inside that range were cancelled. 6 Starting at 11.50.43am and ending at 12.52.54pm the market was informed progressively, as this process was carried out, that 337 trades in specified futures contracts, mostly 90 Day Bank Accepted Bill contracts, were being cancelled. 7 Much of the trading taking place on the markets for futures contracts on debt instruments consists simply of persons buying or selling such contracts either by way of speculation or for hedging an outstanding exposure in the underlying asset. It is customary to refer to such a trades as being "outright trades". 8 There is a kind of trader, however, whose interests lie not in the price of one futures contract but in the difference between the prices of two. Such persons are said to be trading "spreads" and their concern, as one might expect, is not with the price of any particular contract but instead with the differences between the prices in differing contracts. 9 The SYCOM platform operated by the Exchange provides a facility which readily permits the acquisition of spread positions. Each spread position is said to have two legs, and of course, each leg may itself comprise multiple contracts. 10 Amongst the 337 futures contracts which the Trading Manager decided should be cancelled were 27 trades which, in fact, formed part of a spread position. This amputation of those legs transformed the positions held from spread trades into outright positions, drastically altering such trader's financial exposure. Naturally, this is a state of affairs to which spread traders are averse. 11 The three applicants in these proceedings, Transmarket Trading Pty Ltd ("Transmarket"), Kestrel Trading Pty Ltd ("Kestrel") and Biskra Aotearoa Pty Ltd ("Biskra") all held such spread positions and each now claims to have suffered financially by reason of the cancellation of the 27 trades. 12 The pleadings and submissions of the parties gave rise to the following 15 issues requiring resolution: (a) The spread trade issue. The applicants contend that by using SYCOM to enter into spread positions each of them had engaged in a spread "trade" and that the Operating Rules, properly understood, did not permit the cancellation of only a single leg of a spread position. Thus, the Exchange could cancel both legs of a spread position but it was not empowered merely to cancel one leg. The Exchange, for its part, contended that a spread trade was not a contract which was traded on its Exchange and it was only such contracts with which its power of cancellation was concerned. (b) The error trade Issue. Rule 7.1 of the Operating Rules defines an "error trade" to be a: A trade transacted in error or deemed by the Exchange to be transacted in error because it is not in the best interests of a fair, orderly and transparent market. (emphasis added) The designation of a trade as an "error trade" is a significant matter for once it has occurred the Exchange is empowered as a matter of discretion to cancel "error trades" in some circumstances and is required to cancel them, with no room for any discretion, if they fall inside the "market integrity range". The applicants contended that the definition of error trade meant, first, that there could be no error trade unless the trade itself was not in the interests of a fair, orderly and transparent market, an approach which the Exchange submitted left out of consideration the word "deemed" in the definition. Secondly, it meant that the Exchange had to form the opinion that the trade was not in the interests of a fair, orderly and transparent market before there could be an error trade. As to the second argument, it was submitted that all that Mr Raper had done was to determine numerically that some trades lay within the "market integrity range" and this was not the formation by him of the opinion which was necessary to bring those trades within the definition of an error trade. Consequently, the Exchange's power of cancellation could not have arisen. As to the first argument the applicants submitted, and the Exchange denied, that the evidence of one of their witnesses, Associate Professor Ashe, established that the trades posed no threat to the interests of a fair, orderly and transparent market. For its part, the Exchange relied upon another witness, Professor Frino, to establish that in the relevant period the market had been in a disordered state. (c) The appointment issue. The power to cancel trades was vested by the Operating Rules in the trading manager. The applicants denied that Mr Raper had been validly appointed to that office. (d) Formation of the requisite opinion issue. The Trading Manager is empowered to cancel trades if he or she is of the opinion that the trades are not in the "best interests of a fair, orderly and transparent market". The applicants submitted that Mr Raper did not form this opinion before exercising the power to cancel the trades and therefore the power to cancel never arose. Alternatively, the applicants submitted that such an opinion needed to be objectively correct and, utilising the report of Associate Professor Ashe, they argued that such an opinion could never have arisen. (e) The application of the Error Resolution Policy issue. The Exchange has an error resolution policy to deal with the handling of error trades. Transmarket (but not the other applicants) contended that Mr Raper should also have applied the policy to the trading which took place in the 90 Day September 07 contract. If this had occurred, a number of Transmarket's outright positions would also have been cancelled avoiding the need for it to close out those positions itself. The Exchange denied that the policy applied to Exchange generated error trades or that it was bound to act as alleged. (f) The registration issue. The applicants contended that the Exchange had breached the Operating Rules by failing to make the spread trades available for registration through the clearing house. The Exchange denied any obligation to make available "spread trades" for registration. (g) The denial of the benefit of the contract issue. The applicants argued that there was an implied term in the Operating Rules that the Exchange "would do all things necessary on its part to enable the applicants to have the benefit of their contracts" and that this term was breached by the Exchange cancelling one, rather than both, legs of their spread positions. The Exchange contended that such an argument was bound to fail once it was accepted that it had the power to cancel single trades. (h) Further implied terms. Even if the Exchange had the power to cancel single legs of spread positions the applicants argued that such a power was one which had to be exercised reasonably. It was said that there had been a failure to exercise the power in that manner because the Exchange had departed from its own Operating Rules. This the Exchange denied submitting that it was entitled, under the Operating Rules, to cancel single trades. The applicants further argued that the Exchange had failed to act with the due care and skill in cancelling the trades. The lack of skill was said to be demonstrated because the Exchange had not acted in accordance with its own rules in cancelling the trades. (i) Claims in tort. The applicants contended that the Exchange had converted their trades and had been negligent. They also submitted that the Exchange had committed the tort of interfering with the performance of a contract by relieving the other party to each of the cancelled legs from performing its obligations under the relevant futures contract. The Exchange denied all of these contentions. (j) Misrepresentation issues. The applicants contended that they had been misled by the Exchange about the circumstances in which it would cancel spread trades. (k) Direct enforcement of Operating Rules issue. The applicants argued that the Operating Rules had direct effect by reason of certain provisions of the Corporations Act 2001 (Cth) ("the Act"). (l) The unconscionability issue. The applicants contended that it was unconscionable for the Exchange to cancel the trades other than in accordance with the Operating Rules. The Exchange denied that it had acted otherwise than in accordance with those rules. (m) The 12 second issue. The applicants argued, and the Exchange denied, that the market fluctuation did not occur until 12 seconds after the CPI announcement. The apparent purpose of this argument was to limit the ability of the Exchange to cancel trades to a smaller period of time and removing thereby its right to cancel some of the applicants' trades which occurred within that 12 second period. (n) The standing issue. The Exchange noted that all of the trades in question had been transacted through brokers and that under the Operating Rules the brokers operated as principals. It followed, so the Exchange submitted, that the applicants were not parties to the trades and could not, therefore, sue on them. Further, to the extent that the applicants sough to sue on the Operating Rules, the Exchange submitted that the applicants were not parties to those rules either. (o) The damages issues. Most of the damages claimed by the applicants arose from their having to close out their remaining positions after the cancellation of one of the legs of their spreads. The Exchange denied that in some cases they had, in fact, suffered any such loss. For their part the applicants sought exemplary damages. 13 It is useful to deal with these issues in turn.

(a) The Spread Trade Issue 14 The applicants' contention that the Exchange could only cancel the whole of a spread trade and not its constituent legs turns on the wording of the Operating Rules. The operating rules of a licensed market, such as the respondents' Exchange, have the effect, inter alia, of a contract under seal between the licensee of the market (here the Exchange) and each "participant" in that market: s 793B Corporations Act 2001. A participant is a person who is directly allowed to participate in the market, under that market's operating rules: s 761A. The Operating Rules contemplate that there will be both Full Participants and Local Participants. The difference between these two classes is not material to this litigation. In either case, participants are authorised to enter into business on their own behalf in the market. 15 Transmarket is a Full Participant (actually it is a Proprietary Full Participant but nothing turns on that) and Biskra and Kestrel are Local Participants. Accordingly, each is bound by the Operating Rules by force of s 793B. In addition, each has also executed a participant agreement with the Exchange agreeing independently to be bound by those rules. 16 However, none of the 27 cancelled trades in dispute was executed by the applicants in their capacity as "participants". Each of them, in fact, operated through a broker which was also a participant and which executed the trades on their behalf. In both Transmarket and Biskra's case each retained BrokerOne Pty Ltd ("BrokerOne") and the relevant agreements between them and BrokerOne were in evidence. Mr Fleming, a futures trader and director of Kestral, gave evidence on behalf of the second applicant that it had appointed BrokerOne as its executing broker and UBS AG ("UBS") as its clearing broker on 2 November 2006. I accept this evidence but the actual terms of the arrangement between Kestrel, BrokerOne and UBS were not in a satisfactory state in the evidence before me. The document which was said by Mr Fleming to constitute the relevant agreement between all three was incomplete and was missing the critical parts dealing with the status of the brokers. I was told that the missing page was to be found as the first page to another document exhibited by Mr Fleming in his affidavit entitled "CJF 3" but that document was plainly a different one between different parties. I propose, nevertheless, to proceed on the basis that: (a) there is an agreement between Kestrel and BrokerOne appointing the latter as the former's executing broker and between Kestral and UBS appointing the latter as its clearing broker; and (b) that the agreement complies with the Operating Rules. No attempt was made by either party to explain what the difference between these two brokers was and since the relevant page of the agreement is missing from the evidence it is difficult to know clearly. Both parties assumed, however, that the relevant broker for the purposes of the issues in these proceedings was UBS not BrokerOne and in that circumstance, I propose to assume that the agreement complies with cl 2.2.25 of the Operating Rules which provides relevantly: A Full Participant, other than a Proprietary Full Participant, shall have in force a duly signed agreement with each of its Clients, (except where the Client is another Full Participant, as the agreement is deemed and does not require to be signed), containing the following minimum terms: … (c) Benefit to Participant of Contract Registration with SFE Clearing Any benefit or right obtained by any Participant upon registration of a contract with SFE Clearing by way of assumption of liability of SFE Clearing under any contract or any other legal result of such registration is personal to the Participant and the benefit of such benefit or right does not pass to the Client. (d) Client only has Rights Against Participant In relation to all trades conducted on the Exchange by the Participant and all Contracts registered by the Participant with SFE Clearing the Client has no rights whether by way of subrogation or otherwise, against any person or corporation other than the Participant. 17 I proceed on this basis because (a) the agreements between BrokerOne and Transmarket and Biskra are in evidence and do contain such a term; (b) it was not submitted that there was no such a term in the case of Kestrel; and (c) it is appropriate to assume, in the absence of evidence to the contrary, that BrokerOne and UBS complied with their obligations under cl 2.2.25. 18 Later in these reasons I deal with the Exchange's argument that the applicants have no entitlement to sue. This is said to be the case because the principals on those trades were necessarily BrokerOne or in Kestral's case UBS. The present point to be made is that one of the applicants' answers to that argument is that they are entitled to sue as undisclosed principals. This is important because it identifies the contract to be interpreted on the applicants' case as the one between the Exchange and BrokerOne or UBS as undisclosed agents. 19 It is true that the Operating Rules apply by force of s 793B of the Act to each of the applicants as "participants". However, that conclusion has no immediate impact on the issues in this case. None of the applicants, in fact, executed the trades on their own behalf or in their capacity as participants. In my opinion, the binding effect of the Operating Rules arising from s 793B applies only to persons operating as participants. I do not, in that circumstance, read the Operating Rules as directly binding a client operating through a broker when, coincidentally, the client happens also to be a participant. 20 The question then to be determined is whether the contract between BrokerOne and UBS, on the one hand, and the Exchange, on the other, entitled the former to cancel a single leg of a spread. 21 The terms of that contract consist of the Operating Rules. It is necessary to start with the Exchange's cancellation powers and obligations. Clause 1.11.1 of the Operating Rules provides: Cancellation of Trades The Trading Manager may, in his sole discretion, cancel an order, direct a Participant to withdraw an order, or cancel a trade where: (a) an order has been entered or a trade has been executed otherwise than in accordance with the Custom Market Strategy Rules at Rule 3.2.3; (b) an order has been entered or a trade has been executed which is not, in the Trading Manager's opinion, in the best interests of a fair, orderly and transparent market; or (c) the matter cannot be adequately or appropriately dealt with pursuant to Section 5. 22 The critical word here is "trade". Clause 7.1 defines the expression "to trade" and Similar Expressions" to mean: To enter, acquire or dispose of Contracts on a Market operated by the Exchange. 23 This links the concept of a trade to that of a "contract" which, in turn, is defined to mean: A contract entered, acquired or disposed of on the Exchange or capable of being entered, acquired, or disposed of on the Exchange. 24 Consequently, the kinds of trades which can be cancelled under this power of cancellation are those involving contracts "entered, acquired or disposed of on the Exchange" or capable of being so dealt with. 25 Another cancellation power is conferred by cl 1.13.2. It provides: Notification of Error Trades (a) The Exchange may create a No Cancellation Range, a Qualifying Error Range and a Market Integrity Range that, when applied by the Trading Manager in exercise of powers conferred by this Rule 1.13 and Rule 1.11 result in the Exchange taking different actions in response to Error Trades, depending on how far away the trade is effected from a fair price valuation as determined by the Exchange. (b) The Exchange will take the following actions: (i) If the Error Trade is within the No Cancellation Range, the Error Trade will not be available for cancellation; (ii) If the Error Trade is within he [sic] Qualifying Error Range, the Error Trade will not be available for cancellation unless the Error Trade is reported to the Exchange within such time as determined by the Exchange and then the Error Trade will only be cancelled if the counterparty to the Error Trade approves the proposed cancellation of the Error Trade within such time as determined by the Exchange; (iii) If the Error Trade is within the Market Integrity Range, the Error Trade will be cancelled as soon as possible. 26 The definition of "error trade" has been set out above, but for the sake of clarity in the argument I will set it out again: A Trade transacted in error or deemed by the Exchange to be transacted in error because it is not in the best interests of a fair, orderly and transparent market. 27 Critically, this too is connected to the concept of a "trade" and hence also to the idea of a contract "entered into, acquired, or disposed of on the Exchange". 28 The Exchange's powers and obligations of cancellation apply, therefore, to contracts of that kind. The applicants did not deny this but sought to characterise entry into a spread position as being such a contract. 29 In order for the applicants to succeed it would be necessary then for them to establish that each of their spread trades was a contract "entered, acquired or disposed of" on the respondents' Exchange or capable so of being dealt with. It is an unavoidable consequence of that argument - and one from which the applicants do not shrink - that each spread trade must result in a multi-partite single contract. In its simplest form, that contract had to consist of the three cornered contract between the person "acquiring" the spread position and the two other parties at the other end of each leg. However, because spreads may have legs consisting of more than one contract, the argument must necessarily embrace the possibility that a spread contract has as many parties as there are contracts making up its legs plus the spread trader itself. 30 I reject this argument. No such contract either came into existence on the completion of the spread orders nor, even if it did, would it be a contract within the meaning of the Operating Rules. 31 To see why this must be so it is first necessary to say something of the manner in which spread trades occur. It would, of course, be possible to acquire a spread position simply by executing two different contracts. However, if that were to be done there could be no guarantee that the particular differential in price sought by the spread trader could be achieved for the market might well have moved on after the execution of the first contract and before execution of the second contract could be satisfactorily completed. That timing risk is called "legging risk". The Exchange's platform SYCOM offers a facility which, in an automated fashion, executes spread trades with a fixed differential and by doing so removes legging risk, for the spread will not be executed unless SYCOM identifies and simultaneously enters into both of the constituent legs. The person seeking to place such a spread order inputs into the SYCOM terminal the defined spread market, the price differential and the volume sought. Since the price is not important that information is not entered into SYCOM. SYCOM then identifies matching contracts and upon such identification automatically executes both contracts (or more when a leg consists of more than one contract). That operation of the SYCOM system reflects the Operating Rules. 32 Rule 3.2.1 provides: Exchange to Prescribe Contracts and Procedures The Exchange may prescribe Contracts and procedures for Strategy Trading and Participants must execute such Strategy Trades in accordance with this Rule 3.2. 33 A spread trade is a "strategy trade". As rule 3.2.1 contemplates, the Exchange has prescribed the procedures for spread trading. These are as follows (as contained in an explanatory rule to the Operating Rules): 2. - Spread Trading (a) Procedures for Intra-Commodity Spreads 1 A Participant specifies the quantity of Futures Contracts bid or offered and the price differential when entering an Intra-commodity Spread order. 2 A bid will be buying the near month and selling the far month, an offer will be selling the near month and buying the far month. 3 An Intra-commodity Spread order when executed will be filled for both legs by the Trading Platform simultaneously with equal volume. 4 The Intra-commodity Spread market is fully interactive with the underlying market. 5 An Intra-commodity Spread order, if and when matched by the Trading Platform, may trade with other spread orders or orders from the underlying market. 6 When an Intra-commodity Spread order is matched with another Intra-commodity Spread order the Trading Platform will use the spread trade price algorithm to determine the proceeds of the individual legs, as detailed below. 7 As per Rule 3.2.2(b) each individual leg of an Intra-Commodity Spread is allocated to the same account. (b) Procedures For Inter-commodity Spreads and Inter-Regional Spreads 1 A Participant specifies the quantity of the spread bid or offered and the price differential when entering an Inter-commodity Spread or Inter-regional Spread order. 2 Inter-commodity Spread or Inter-regional Spread markets pre-defined by the Exchange shall be at a ratio of one to one unless otherwise defined by the Exchange from time to time. 3 If an Inter-commodity Spread or Inter-regional Spread order is traded at a volume ratio then one lot of an Inter-commodity Spread or Inter-regional Spread order shall be, if and when matched, matched at the pre-defined volume ratio for the individual legs. 4 An Inter-commodity Spread or Inter-regional Spread order will be filled for both legs automatically by the Trading Platform simultaneously with the pre-defined volume ratio when matched. 5 The Inter-commodity Spread or Inter-regional Spread is partially interactive with the underlying market. 6 An Inter-commodity Spread or Inter-regional Spread order, if and when matched by the Trading Platform, may trade with other Inter-commodity Spread or Inter-regional Spread orders or orders from the underlying market. 7 When an Inter-commodity Spread or Inter-regional Spread order is matched with another Inter-commodity Spread or Inter-regional Spread order, the Trading Platform will use the spread trade price algorithm as detailed below to determine the prices of the individual legs. 8 As per Rule 3.2.2(b) each individual leg of an Inter-commodity Spread or Inter-regional Spread is allocated to the same account. 9 An Inter-Commodity Spread order can be traded so that the spot expiry month of one commodity can be spread against an expiry month of another commodity other than the spot expiry month. (c) Spread Trade Price Algorithm The Trading Platform uses the following algorithm to determine the individual leg prices for Spread-to-Spread trades: 1 If there is a bid and offer in the near month, then the algorithm uses the mid point of this bid and offer to establish the near month price, the spread differential traded at will be used to establish the far month's price. 2 In the absence of a bid and offer in the near month, the algorithm uses the mid point of the bid and offer in the far month to establish the far month price. The spread differential traded at will be used to establish the near month's price. 3 In the absence of a bid and offer in the near and far month, the algorithm uses any bid or offer existent in the near month to establish the near month price. The spread differential traded at will be used to establish the far month's price. 4 In the absence of a bid or offer in the near month, the algorithm uses any bid or offer existing in the far month to establish the far month price. The spread differential traded at will be used to establish the near month's price. 5 In the absence of any of the above, the algorithm uses the closing price (assume this is the settlement price) in the near month to establish the near month price. The spread differential traded at will be used to establish the far month's price. (d) Specified Tick Ranges For table containing Specified tick Ranges please click onto this link: Specified_Tick_Range_Rule_3_2 34 An inter-commodity spread is, by way of explanation, one transacted in contracts involving different commodities whereas an intra-commodity spread is one involving positions in the same commodity. 35 I turn then to the argument that upon execution of a spread order a single spread contract comes into existence. There are insuperable difficulties standing in the way of accepting this argument. First, one of the essential terms of the spread order necessarily must be the price differential. Further, because it is only that differential which is of any interest to a spread trader the terms of the spread order need not include any terms as to the price of the underlying legs and, as already noted, the SYCOM system is not configured to require the input of that (irrelevant) information. However, the other parties to this alleged single spread contract will often be persons seeking entry into a futures contract at a nominated price. Price, therefore, will be, one of the essential terms of those contracts yet it will form no part of the contract sought by the person placing the spread order. Correspondingly, it is impossible to locate from the counterparties' perspective any term concerned with price differential. 36 Secondly, allied to the first problem is the fact that the counterparties on each leg need not know that they are party to a futures contract which is part of a spread. On the applicants' case such a party has not entered into a futures contract with one other party but, in fact, into a multi-partite contractual arrangement potentially with an unknown number of unknown parties. 37 Thirdly, the inevitable consequence of the applicants' argument is that if the counterparty is itself a party to another spread then both spreads become a single conglomerated contract. That process of agglomeration need know no bounds. If five or six spread trades are connected by having multiple matched legs this leads to the conclusion that what is in play is a single contract with numerous parties all understanding themselves to have entered into one kind of arrangement but, in fact, entering into a very different one. 38 Fourthly, those observations highlight that no such single contract can come into existence because there is no correspondence between the terms of the contract that the counterparty understands itself to be entering into - a futures contract with one other party - and the contract contemplated by the party placing the spread order - a multi-partite arrangement concerned with differences in price and not price itself. For those reasons the existence of a single contract constituted by both (or all) of the legs to a spread must be rejected. Its existence would be antithetical to the basic principle of contract law that there can be no formation of a contract without agreement. Without entering into the debate as to whether contractual formation is always to be approached on the basis of the offer-acceptance model, it is apparent nevertheless that two parties understanding themselves to be agreeing to completely different things cannot be held to have formed a contract. Thus a person who volunteers information to the police about a crime in ignorance of the existence of a standing offer to pay a reward for such information cannot be held to have formed a contract thereby. In R v Clarke (1927) 40 CLR 227 Higgins J said (at 241): The reasoning of Woodruff J. in Fitch v. Snedaker seems to me to be faultless ; and the decision is spoken of in Anson (p. 24) as being undoubtedly correct in principle : - "The motive inducing consent may be immaterial, but the consent is vital. Without that there is no contract. How then can there be consent or assent to that of which the party has never heard ? " Clarke had seen the offer, indeed ; but it was not present to his mind - he had forgotten it, and gave no consideration to it, in his intense excitement as to his own danger. There cannot be assent without knowledge of the offer ; and ignorance of the offer is the same thing whether it is due to never hearing of it or forgetting it after hearing. But for this candid confession of Clarke's it might fairly be presumed that Clarke, having once seen the offer, acted on the faith of it, in reliance on it ; but he has himself rebutted that presumption. 39 It is inconceivable that a person who understood himself to be entering into a contract to buy 100 90 Day September 07 contracts from one person could, by so acting, be entering into a spread contract consisting of a contract to sell 1000 90 Day September 07 contracts and to buy 1000 90 Day March 08 contracts at a price differential of 0.3 without any terms as to price with 20 other parties of whose existence he was completely ignorant. 40 The contract potentially brought to life by this argument owes more to Mary Shelley's Frankenstein than it does to Corbin on Contracts. However, whatever else one might say about this contract one can certainly say that it would not be a "Contract" within the meaning of the Operating Rules and hence entry into it could not be a "Trade" either. I have already sketched the connection between those concepts which the definition provisions of the Operating Rules contemplate, in particular, the necessity for there to be a contract "entered, acquired or disposed of on the Exchange" or so capable before there can be a "Trade". Those words alone are sufficient to exclude the possibility of a spread contract being a single contract and hence a contract of that kind. The evidence did not suggest that the applicants were trading spread to spread or that there was a market in which the only participants were spread traders and the only thing traded spread positions. I was taken to no part of the Operating Rules which suggested the existence of such a market. 41 The only contracts so traded are those that are "listed" by the Exchange. Once they are listed the rules provide detail as to the terms and to the method of their trading. Those rules are set out in Part 6 of the Operating Rules. That part deals specifically with interest rate contracts, equity contracts, currency contracts and commodity contracts. There is no hint in those Rules that the Exchange conducts a market in "spread contracts". No attempt was made before me to establish the existence of such a market. 42 I reject therefore the applicants' contention that the powers of cancellation possessed by the Exchange could only be used to cancel the whole of a spread position. The spread positions were not "contracts" at all and they could not be "contracts" which were traded on the Exchange. I should add for completeness that I do not accept that the interpretation of these terms in the Rules is a matter upon which expert evidence as to their meaning in the industry is of any assistance. The task at hand is the construction of a document formulated by the Exchange in the discharge of quasi-regulatory functions. It is given legal force by s 793B of the Corporations Act. The understanding of persons in the market about the Operating Rules is not the object which is given force by s 793B. This is not a case where the Court is seeking to construe the meaning the parties to a contract intended by the use of a particular specialised trade term. Rather, what is involved is a deemed contract written by the Exchange alone and given force by statute. The interpretation of such a statutory contract does not turn on the intentions or understandings of the persons upon whom it was imposed. (b) The error trade issue 43 The Exchange's powers of cancellation and the facts surrounding the actual cancellation of the 27 trades the subject of these proceedings are best explained together. 44 I have already set out the events, in broad compass, which occurred between 11.30am and 11.33am. At the risk of repetition they were, in summary, the 90 Day and 3 Year September 07 contracts decreased 12 and 31 points respectively whilst the 90 Day December 07, March 08, June 08 and September 08 contracts increased by between 12 and 17 points, before retracing their steps by 11.33am. It will be recalled that the CPI announcement raised the spectre of future interest rises. Generally speaking, the price of debt instruments such as bonds and bank bills, go down as interest rates go up, so that the 90 Day September 07 and 3 Year September 07 contracts moved as might have been expected (that is, down) whereas the price of other 90 Day contracts moved contrary to expectation (that is, up). 45 Mr Raper was watching his SYCOM screen immediately after the CPI announcement and observed an unrelated anomaly in the 3 Year September 07 contract, in that the gap between the bid and offer prices was larger than was usual, however, apart from this minor matter it was behaving otherwise normally, that is, I interpolate, decreasing in price. He thought that the anomaly was likely to be the result of thin liquidity. More significantly, to his surprise, he observed that the 90 Day December 07 contract was rising rapidly. He had never seen the prices of such correlated contracts move in opposite directions by such a significant degree following a major announcement. He then turned his attention to the 10 Year September 07 contracts and saw that they were decreasing in price (as expected) and was less concerned. 46 His initial impression was that the unexpected upward price movement in the 90 Day December 07 contract must have been caused either by a technical failure in the SYCOM system itself or by reason of some participant having made a large error in the entry of an order. 47 After about 20 or 30 seconds he left his office to go to the Exchange's operations room which was located just outside. He expected to find his staff receiving phone calls about the unusual price movements and for one or more participants to be reporting that an error had taken place in their trading. However, the phones were not ringing. This was such an unexpected outcome for Mr Raper that his first thought was that the phone system was down. The phones were then checked and found to be in working order. 48 The phones then began to ring. He stood in the Operations Room and watched the SYCOM screen which, apparently, displays the most recent 1,000 trades. The extent of the trading was such that the trades which had occurred at 11.30am were about to disappear from the screen. At 11.32am Mr Raper observed that the post September 07 90 Day contracts were retracing their previous upward movement. By the end of the three minute period Mr Raper observed that they were now trading below the price they had been trading at immediately prior to the CPI announcement. By 11.33am Mr Raper thought that trading had stabilised. He thought that the trading he had witnessed was both "extraordinary and disorderly". 49 Consequently he thought that a disorderly and unfair market had come into existence affecting a range of interest rate futures. He decided that he needed to investigate what had occurred, particularly because he knew the issue had not been caused by a technical problem with SYCOM. 50 In order to understand what had happened next it is necessary to say something about error trades. A practical problem which arises from time to time is the erroneous placing by participants of orders. This may come about by incorrect data entry - for example, a trader enters a price 93.4 rather than 94.3 into SYCOM - or by any other number of ways in which human fallibility may manifest itself. Such errors are, of course, a concern to the person placing them but they can also be of concern to the efficient operation of a market. The Operating Rules of the Exchange contain elaborate, although poorly drafted provisions, regulating how such trades are to be treated and the circumstances in which they may be cancelled. As might be expected they involve a balancing between the rights of the persons placing the orders, their counterparties and the Exchange itself. 51 Mr Raper, it will be recalled, was expecting the phones to ring and for someone to report the occurrence of an error trade but that call never came. The difficulties in this case arise because it is possible - without such a report - for the Exchange to activate the error process itself. The definition of "error trade" in cl 7.1, which I have set out above, has two limbs which reflect the assumption underpinning the Operating Rules that there will be both error trades reported by participants and error trades flagged by the Exchange itself. This case concerns the second limb of the definition of error trade, that is, the limb applying in the case of trades deemed by the Exchange to be in error, which I shall refer to as "Exchange generated errors". 52 The language of that second limb is ambiguous in a number of ways. One reading is that it is activated by the Exchange's decision to treat a particular trade as an error trade because of the Exchange's own view that the trade was not in the best interests of a fair, orderly and transparent market. Another is that it may mean that if a particular trade is not, as a matter of objective fact, in the interests of such a market then the Exchange may deem the trade to be an error. A third reading - propounded by the Exchange- is that the clause is a definition provision which does not enable the Exchange to deem anything about a trade but instead is to be read as referring to situations where such a deeming has already occurred under some other provision of the Operating Rules. 53 I have already set out above cl. 1.13.2 which deals with error trades. There are several features of it requiring explanation. The power contained in (a) is a power to fix specified ranges but the power is discretionary and need not be exercised; so much flows from the word "may". What are the ranges? There are three: the qualifying error range, the no cancellation range and the market integrity range. The no cancellation range and the qualifying error range are defined in clause 7.1 in these terms: Qualifying Error Range The range, as determined by the Exchange, above or below a fair price valuation, as determined by the Exchange, within which trades will not be cancelled unless the Error Trade is reported to the Exchange in accordance with procedures determined by the Exchange and counterparty approval is obtained. No Cancellation Range The range, as determined by the Exchange, above or below a fair price valuation, as determined by the Exchange, within which Error Trades will not be cancelled.

54 Neither of these provisions, it will be noted, contains deeming provisions. This is in contrast to the marketing integrity range which is defined this way: Market Integrity Range The range, as determined by the Exchange, above or below a fair price valuation, as determined by the Exchange, within which all trades are deemed by the Exchange to impact the fairness, orderliness and transparency of the market and will be cancelled.

(emphasis added) 55 The mechanisms by which these ranges are to be calculated are not set out in the Operating Rules but are contained instead in a document called the "Error Resolution Policy" which is one of the Exchange's operating policies. The precise legal status of these policies was not explored in any detail before me but is not, for reasons which will become apparent, material. Despite that, the Error Resolution Policy does throw light on the steps Mr Raper subsequently took. The policy, in its own terms, is only available when invoked by a participant. Section 1 of the policy is headed "Invoking the Error Trade Policy" and is immediately followed by this text: If an SFE Participant believes that a trade is executed through SFE at a price that is in error, they must contact the SFE Service Desk on +612 9256 0677 within 5 minutes of execution. If SFE Service Desk is not notified within five minutes of the execution time of the asserted error trade, the trade will stand within the NCR and QER and be cancelled if within the MIR. Trades called into question within five minutes will be evaluated in accordance with sections 4, 5 and 6 of this policy. However, the SFE will cancel trades reported after the five minute deadline provided the trade price exceeds the MIR from an SFE determined Fair Price Valuation of the respective contract. Participants remain responsible for the reporting of trades executed within the MIR, with delays considered a contravention of expected risk management and reported to the Exchange Compliance and Surveillance unit. The ERP will consider errors on the basis of price only. Inadvertent order entry, incorrect volume or contract will not be considered a basis for invoking the ERP. 56 It will be observed that no provision is made for the policy to be invoked by the Exchange. This feature is observed throughout and there is to be found in it no reference at all to the processing of Exchange generated error trades. 57 This gives rise to a problem. The provisions of Operating Rule 1.13.2 assume that a market integrity range may be calculated for all error trades. The definition of that term is such that error trades flagged by the Exchange itself are governed by the same rule. The policy, however, established to regulate error trades does not, in terms, apply to Exchange generated error trades. This deficiency meant that there was, therefore, no stated mechanism which actually indicated if, when and how Mr Raper was to determine if an Exchange generated error trade had occurred. 58 At the heart of the policy is the notion of a fair price valuation ("FPV") which is defined this way: The Fair Price Valuation (FPV) will be determined by the SFE using any or a combination of the following criteria: s Valid last trade price preceding the entry of the asserted error trade s Valid bid or ask available in the market. s Preceding Daily Settlement Price s Intra and inter spread relationships s Market conditions immediately before and after the transaction(s) s Theoretical valuation s Independent third parties s Physical markets s Utilisation of RFQ's 59 It will be noted that it does not prescribe the method by which the FPV is to be calculated. The FPV then forms the centrepiece in the calculation of the market integrity range. Clause 6 of the policy provides: The Market Integrity Range (MIR) is defined as executed prices beyond 250% of the designated number of ticks in the Specified Tick Range (PDP and Appendix 1 of the ERP) for the particular product from the SFE determined Fair Price Valuation (FPV). 60 A "tick" is the smallest unit of price change in the market. The appendix to the policy provides that the market integrity range for contracts on 90 Day Bank Accepted Bills, 3 Year and 10 Year Australian Treasury Bonds is to be 12.5 ticks above or below the FVP. 61 Having set that out it is useful to return to consider the steps which Mr Raper took. He and his staff began to investigate the price movement. He caused one of his staff to send a message to all participants that the Exchange was investigating trades between 11.30am and 11.33am and this was done at 11.38am. He decided to calculate the FPV for each of the affected contracts which he thought was the only way of measuring the disorder in the markets. As a matter of strict formality, it was not possible to calculate an FPV under the policy for those trades because it did not apply to Exchange generated error trades. If one wished to describe with legal precision what Mr Raper was doing one might say that he was applying the procedures contemplated by the policy to the trades in question even though it did not, in strict terms, apply. So viewed, he was using it as a tool to discern the degree of orderliness in the market. 62 There was some controversy about what then occurred. Mr Raper gave evidence that he was confident that the trading in the 10 Year and 90 Day September 07 contracts was consistent with the operation of a fair, orderly and transparent market. This was because they had not experienced the same degree of price movement or directional change. He was not interested - for the purposes of deeming any trades in these contracts as error trades - in calculating an FPV for either of these contracts or a market integrity range. Nevertheless, he concluded that it would be useful for his own purposes to calculate an FPV for them and, in particular, the spread differential between their values, which he could then compare to the other contracts. He undertook, therefore, a process which for all intents and purposes looked the same as the process of calculating the FPV for the two contracts under the error trade procedures. There was other evidence that an FPV for each of these contracts was, in fact, calculated. So, for example, in a subsequent report by the Exchange's General Manager of Licence Compliance the following statement appeared: FPVs were determined for 3 Year Bond Contracts, 10 Year Bond Contracts, 90 Day Bank Accepted Bill Contracts for spot and subsequent months. 63 "Spot" referred to the September 2007 contracts so that this document, at least, referred to FPVs having been calculated for the two contracts in question. The Exchange's General Manager of futures supervision and capital management, Mr Coaldrake, also gave evidence that Mr Raper had calculated FPVs for these two contracts. It was suggested to Mr Raper in cross-examination that, in truth, he had calculated FPVs for the two contracts. Since the policy did not apply to the process which was being applied there is a certain aridness in determining whether Mr Raper himself thought he was using it to calculate an FPV under the policy. However, I record my conclusion that he did not calculate an FPV for these two contracts under the policy and he did not regard himself as so doing. 64 My reasons for this are: (a) the chief protagonist in these events was Mr Raper and the decisions were his. Mr Raper's grasp of events was much clearer than Mr Coaldrake's. In saying that I mean no disrespect to Mr Coaldrake; it is simply that Mr Raper was his superior, was the person making the decisions and, in my observation, was more sophisticated in his appreciation of the issues. In a choice between Mr Coaldrake's independent recollection of the events in question and Mr Raper's, I prefer the latter's. (b) the investigative report is of course documentary. However, it is not a contemporaneous document. Given that Mr Raper did calculate the FPV of the two contracts it is easy to understand why that might have been thought by Mr Coaldrake or the author of the report to be the calculation of an FPV under the policy. However, for Mr Raper the language of the FPV connoted the commencement of a process which could only lead to the determination of a market integrity range and the cancellation of trades and this was plainly not what Mr Raper was doing for those two contracts. (c) there was no reason for Mr Raper to be making this up. His evidence that the two contracts were behaving normally is consistent with the facts: they were trading as expected. The applicants' contentions require one either to think that Mr Raper actually thought the contracts were trading unusually, decided to activate the FPV process so as to calculate the market integrity range and then, unaccountably, did not do so or, even less plausibly, that he did not think that the contracts were trading unusually but activated the process anyway and then sought to disguise the fact that he had done so. Each of these scenarios is implausible and complex. Mr Raper's explanation is straightforward. I prefer it. 65 Mr Raper then set about calculating the FPV for six contracts about which he was concerned, namely, the 3 Year September 07, the 90 Day December 07, 90 Day March 08, 90 Day June 08, 90 Day September 08 and the 90 Day December 08 contracts. The process by which he did this was complex and there is no particular advantage in describing it. It suffices to say that the FPV for each contract was determined, a market integrity range of 12.5 ticks applied and 337 trades then identified as falling within that calculated range were subsequently cancelled. That cancellation process took place in stages between 11.50.43am and 12.52.54pm. 66 The issues of power which arise are these. The applicants say that Mr Raper never formed the opinion that any of the 337 trades were "not in the best interests of a fair, orderly and transparent market" so that the power of cancellation under Rule 1.11.1 could not arise. All that he had done was to determine that certain contracts fell within the market integrity range but that, by itself, did not involve on his part the formation of any particular opinion. It was simply a mechanical process which could tell one nothing about whether the market was fair, orderly or transparent. Further, since he never formed the opinion that the trades were not in the interests of a fair, orderly and transparent market they could not have been error trades and the machinery of cl. 1.13.2 could not have been validly activated. 67 The Exchange, for its part, was explicit both in its submissions and in its defence. It accepted that a deeming by the Exchange was needed in order to bring a trade within the definition of an "error trade" but pointed to the definition of the market integrity range which, in terms, deemed trades falling within it to impact on the fairness, orderliness and transparency of the market. The Exchange's point was that when Mr Raper determined that the 337 trades lay within the market integrity range that brought into play the definition of that term which meant that the trades were "deemed by the Exchange to impact on the fairness, orderliness and transparency of the market". That was an event of deeming which, therefore, brought the trades within the second limb of the definition of "error trade", that is, a trade "deemed by the Exchange to be transacted in error because it is not in the best interests of a fair, orderly and transparent market". There being an error trade Mr Raper was therefore authorised to under cl. 1.13.2 to calculate the market integrity rang and, having determined that certain trades fell within it, was obliged to cancel those trades. The Exchange did not seek to argue that it could rely upon cl. 1.11.1 standing alone. Instead, it saw cl. 1.13.2 and 1.11.1 as operating together, each qualifying the other. 68 Another form of the Exchange's argument was to observe that the deeming referred to in the definition of "error trade" was to be seen as referring to a process which encompassed a determination of the market integrity range. 69 Despite the appeal of commonsense there are real difficulties with the Exchange's position. For one thing, it pays little or no attention to the need to have "error trades" before the machinery of cl 1.13.2 can be enlivened. Its submission that the trades became error trades - consistent with the definition of the market integrity range - once it was determined that the trades in question were within that range is an exercise in bootstrapping. One could only be determining the market integrity range if one was already dealing with an error trade as defined. But on the Exchange's argument, any particular trade's status as an error trade would not be known until after it was determined that it lay within the market integrity range. The difficulty with that view is that it means that one has to apply cl 1.13.2 to determine whether it applies. This is, I fear, circular. Nor do I accept the Exchange's response to that allegation of circularity, namely, that the definition of error trade and market integrity range should be seen as erecting a single process to which, I infer, notions of chronology should not be applied. 70 The difficulty can be seen more clearly by asking, on the Exchange's argument, how one can have an Exchange generated error trade which is subsequently found to be in the no cancellation range. The definition of the no cancellation range contains no provision deeming the trade not to be in the interests of a fair, orderly and transparent market and, in that regard, is materially different in operation to the definition of the market integrity range. That being so, there is no deeming provision which can bring the trade in question within the second limb of the definition of error trade. The Exchange's argument cannot, therefore, explain the phenomenon of Exchange generated error trades which do not thereafter fall within the market integrity range. This is not an idle quibble - Mr Raper calculated a FPV for many more than the 337 contracts which were cancelled. On the Exchange's argument none of these uncancelled contracts can have been "error trades" because, not falling within the market integrity range, none were deemed not to be in the interests of a fair, orderly and transparent market. That being so, there can have been, on this view of things, no warrant for Mr Raper to calculate the market integrity range for them since this could not have been authorised by cl. 1.13.2. 71 The short fact is that the definition of "error trade" refers to an act of deeming by the Exchange that a trade has a particular quality. The only such opinion put forward by the Exchange in its defence was that flowing from Mr Raper's determination that the trade lay within the market integrity range after applying clause 1.13.2 but that was, as I have endeavoured to show, circular. 72 This is not to say that the applicants' construction does not itself give rise to serious difficulties. There is a question of utility hanging over a reading of clause 1.13.2 which requires an initial determination of whether a trade is in the interest of a fair, orderly and transparent market as a step along the way in a process which will determine whether the trade should be cancelled. That tension, in a sense, is at its most acute when that subsequent determination leads to the conclusion that the trade lies in the no cancellation range for there is in that case an incongruity between that outcome and the initial determination that the trade was not in the interests of a fair, orderly and transparent market. However, that is not inevitably illogical - the procedure in clause 1.13.2 may be seen as a way of testing the correctness of the initial opinion which activated it. So viewed, the trading manager must form the opinion that the trade in question is not in the interests of a fair, orderly and transparent market. If a subsequent determination that the trade falls within the no-cancellation range occurs this may be seen as a reversal of the effect of that initial opinion by a process mandated by the Operating Rules. In any event, these esoteric problems have to be kept in perspective. The ordinary operation of cl. 1.13.2 does not involve Exchange generated error trades at all and it is only in that limited area that these tensions exist. 73 It follows from those observations that neither party's construction of the Operating Rules is entirely free from difficulty. Those tensions are generated, I venture to suggest, by the fact that the Operating Rules insofar as they seek to regulate Exchange generated error trades show few signs of careful drafting. However, the difficulties generated by the Exchange's construction are greater than those generated by the applicants'. Although the matter is not free from doubt, I prefer the applicants' construction. The case was, I should say, only put on a basis that the opinion in question was to be supplied by the effect of Mr Raper having concluded that the trades fell within the market integrity range. It was not said, for example, that he had formed an opinion independent of that process before 11.33am. (c) Was Mr Raper validly appointed to the office of Trading Manager? 74 At paragraphs 23D and 23E of the third further amended statement of claim the applicants allege that Mr Raper had not been validly appointed to the position of Trading Manager. The power of cancellation in Rule 1.11.1(b) was vested in the Trading Manager with the consequence that the cancellations were, so it was said, invalid. For its part, the Exchange denied that Mr Raper had not been validly appointed, said that it did not matter even if he had not been, pointed to the fact that the power of cancellation existed under clause 1.13.2 (as well as clause 1.11) and that the power in clause 1.13.2 was exercisable by the Exchange and not by the Trading Manager. 75 Mr Raper was twice appointed to the position of Trading Manager but the applicants contend that both appointments failed. The first appointment took place on 20 November 2001 when the board of the Exchange purported to appoint him to that office. As at that date, however, the business rules of the Exchange provided that only an employee of it could be appointed to the position of Trading Manager. So much flowed from Trading Rule 1.1 which defined "Trading Manager" thus: The employees of the Exchange designated by the Board or its delegate, who shall supervise trading in accordance with the Trading Rules or, in the absence of the Trading Manager, any Exchange employee designated by the Chief Executive from time to time to act as a Trade Manager. 76 In fact, at this time the Exchange had no employees as a corporate re-arrangement was taking place. The first face to face meeting of the directors of the Exchange took place on 20 November 2001. The minutes of that meeting show that the company was in something of an interim state until trading was commenced. One of the resolutions passed at that meeting involved retaining the Exchange's parent, SFE Corporation Limited, to provide staff to the Exchange. 77 Clearly someone within the Exchange perceived that the definition of "Trading Manager" had potential difficulties in terms of it requiring that person to be an employee of the Exchange since on 14 December 2001 the parent of the Exchange, SFE Corporation Limited, resolved to amend the Exchange's constitution to permit delegation to employees of SFE Corporation Limited (of which Mr Raper was one). On the same day, a formal resolution amended the definition of "employees" in the Exchange's constitution so that it now included employees of SFE Corporation Limited. These amendments were notified to the Australian Securities and Investments Commission on 17 December 2001 and took effect on 15 January 2002 being 29 days after their lodgement with the Commission. 78 The Exchange submitted that when Mr Raper, who was an employee of SFE Corporation Limited, subsequently began exercising the powers of the Trading Manager this amendment meant that he was the Trading Manager even though, on the date of the appointment - 20 November 2001 - that rule did not authorise his appointment. 79 The indoor management rule - now expressed in s 129 of the Corporations Act 2001 - gives protection to those who deal with companies against arguments such as the one currently articulated by the applicants. However, that rule is not directed to the situation where an outsider seeks to contend, as against the company itself, that an internal appointment is invalid. 80 The Exchange's submission was that the appointment of 20 November 2001 was to be given an ambulatory effect coming into force only when Mr Raper took up his office and that, at the time in January 2002 when he purported to exercise powers under that position, he came within the definition of "employee" which had by then been amended. I reject this submission on the basis that it is simply not what the resolution says. Its wording is as follows: The Board confirmed the following appointments/ delegations:

• the appointment of the General Manager Market Data and Operations of SFE Corporation Limited and each of Messrs Heath Waters, David Raper, Paul Stonham and David Commins, as a Trading Manager of the Exchange;
• the delegation to the General Manager Market Data and Operations of SFE Corporation Limited, the authority to designate an employee of SFE Corporation Limited as a Trading Manager on a temporary basis from time to time, to act as Trading Manager during all or part of any day or night trading session; 81 However, I accept the Exchange's alternate argument that it impliedly designated Mr Raper as the Trading Manager. Beyond any doubt it was intended that he should so act and, just as clearly, that he did so act. Indeed, there is something distinctly surreal about this argument of the applicants. The issue is whether Mr Raper had the authority of a Trading Manager; he was held out by the Exchange as a Trading Manager for many years and so conducted himself. This is not an administrative law case where a person can challenge a decision by impugning the appointment of the decision-maker: see Cassell v R (2000) 201 CLR 189 at 193 [17]-[19] per Gleeson CJ, Gaudron, McHugh, and Gummow JJ, 210-211 [70]-[73] per Kirby J; s 5(1)(c) Administrative Decisions (Judicial Review) Act 1977 (Cth). A contention by the Exchange that he was not its Trading Manager would have been quite untenable. He had, on any view, the implied authority of the Exchange to perform the functions of a Trading Manager: cf. Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 502-503 per Diplock LJ; Equiticorp Finance Ltd (In liq) v Bank of New Zealand (1993) 32 NSWLR 50 at 132-133 per Clarke and Cripps JJA. 82 Quite apart from that, the Exchange again appointed Mr Raper to the same office on 14 December 2005. At that time Mr Philip Galvin designated Mr Raper as a Trading Manager. The applicants contend that Operating Rule 7.1 (which was then in force) only permitted the Board or its delegate to make such an appointment. Rule 7.1 provided: The employees of the Exchange designated by the Board or its delegate, who shall supervise trading in accordance with the Operating Rules, or, in the absence of the Trading Manager, any Exchange employee designated by the Chief Executive from time to time to act as Trading Manager. (emphasis added) 83 Mr Galvin was the Executive General Manager, Business Operations. The board had not delegated the function of appointing a Trading Manager to Mr Galvin. However, it had delegated that function to Mr Elstone who had, in turn, sub-delegated it to Mr Galvin. The applicants submit that the reference to the designation by the board's delegate was not apt to cover a sub-delegation. I reject this submission. There is no reason whatever to read the delegation as not applying in the case of a sub-delegation. Even if there were, it would be overcome, as the respondent submitted, by Operating Rule 1.3.2 which provides: The Chief Executive may, by written notice, delegate to a member of the staff of the Exchange, any powers or functions exercisable by him pursuant to any Operating Rule, regulations or procedures made by the Exchange or pursuant to any delegation granted to him which he may delegate according to law. 84 Thus, Mr Elstone was expressly authorised to sub-delegate his authority to appoint Trading Managers to others. He did so. In those circumstances I reject the argument that Mr Raper was not validly appointed to the office of Trading Manager. (d) Were the trades in the interests of a fair, orderly and transparent market? 85 I have already accepted the contention that the trades in issue were not error trades because Mr Raper had not formed the requisite opinion that they were not in the interests of a fair, orderly and transparent market before purporting to activate the machinery of cl 1.13.2 and its apparatus of ranges. There being no error trades that apparatus was not validly put into action. 86 For completeness, I note that the applicants put an alternate argument that the Exchange could not form the opinion that a trade was not in the best interests of a fair, orderly and transparent market unless, in fact, the trades objectively viewed had that quality. The applicants further submitted that the trades lacked that quality. I reject the first submission. The definition of error trade calls, in its second limb, for an act of deeming. It would be anomalous to read a deeming clause - surely designed to circumvent the need for consideration of an actual state of affairs - as being limited in its application to circumstances where the thing deemed was in fact the case. The actual words used in the definition "deemed by the Exchange to be transacted in error because it is not in the best interests of a fair, orderly and transparent market" are not to be read as directed to anything but the mental states of the Exchange or its officers. 87 The second argument does not, therefore, arise. However, lest the matter go further, I should record my views in brief. On this hypothesis the definition does require for its enlivenment trades which are not in the best interests of a fair, orderly and transparent market. So viewed the Operating Rules provide for a standard, namely, "fair, orderly and transparent". 88 Those words have their source in the equivalent expression in s 792A of the Corporations Act which provides (relevantly): A market licensee must: (a) to the extent that it is reasonably practicable to do so, do all things necessary to ensure that the market is a fair, orderly and transparent market. 89 There are several references in the Operating Rules to a market which is fair, orderly and transparent (for example, see Operating Rule 1.11.1(b), the definition of "market integrity range" and the definition of "error trade") and these are, I think, to be seen as facultative of the obligation imposed upon the Exchange by s 792A. That, in turn, reflects the fact that one of the express objects of Chapter 7 of the Act is the promotion of markets having that quality: see s 760A(c). 90 Neither party referred to any case in which the expression "fair, orderly and transparent" had been considered. The present form of s 792A was inserted as a result of the Financial Services Reform Act 2001 (Cth). At the time that the Financial Services Reform Bill 2001 was introduced into the House of Representatives there was circulated an Explanatory Memorandum which included a modest section dealing with the notion of a fair, orderly and transparent market. It was as follows: Fair, orderly and transparent 7.36 The idea of a 'fair, orderly and transparent' market is reflected in proposed paragraph 792A(a), and hence in proposed paragraph 795B(1)(c). 7.37 The word 'transparent' is included in the light of the overwhelming support of Australian and overseas commentators for the value of a transparent market. These include [sic] final report of the FSI. 7.38 In interpreting the phrase 'fairness, orderliness and transparency', it is desirable that all words in the phrase be considered together. One word taken out of context may lead to a course of action which conflicts with the other words in the phrase. Thus, transparency may on occasions be in conflict with liquidity, yet liquidity is needed for an orderly market. The tensions between the three words need to be resolved sensibly, so that an appropriate balance is struck between the demands of different market participants. This is specifically acknowledged in the clause 'to the extent that those objectives are consistent with one another'. 91 Two matters may be discerned from that. First, the expression is a composite phrase to be interpreted as a whole and not in parts. Secondly, overseas material may have some relevance. 92 That may be of some limited assistance because the notion of fairness, orderliness and transparency is also found in s 11A of the Securities Exchange Act of 1934 (15 USC s 78k-1 (2006 & Supp II, 2008)) of the United States which, relevantly, is as follows: s 78k-1. National market system for securities; securities information processors (a) Congressional findings; facilitating establishment of national market system for securities; designation of qualified securities (1) The Congress finds that - … (C) It is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure - (i) economically efficient execution of securities transactions; (ii) fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets; (iii) the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities; (iv) the practicability of brokers executing investors' orders in the best market; and (v) an opportunity, consistent with the provisions of clauses (i) and (iv) of this subparagraph, for investors' orders to be executed without the participation of a dealer 93 That statement suggests, at least in the United States, some kind of link between the notion of fair and orderly markets and the conduct of a more efficient and an effective market. That view of the operation of s 78k-1 derives some support from the decision in Southern Union Co v Missouri Public Service Commission 138 F Supp 2d 1201 at 1205 [2] (W.D.Mo. 2001) per Laughrey DJ where it was said: In 1975, Congress passed Section 78K-1, amending the SEA, which instructs the SEC to protect investors and maintain fairand orderly marketsby creating more efficient and effective market operations. 15 U.S.C. s 78K-1(a)(2) (emphasis added) 94 In the US, the Securities and Exchange Commission has promulgated an order entitled "Order Instituting Administrative and Cease-And-Desist Proceedings", Exchange Act Release No. 34-49500, 82 SEC Docket 1903 (March 30 2004) which deals with the topic. Paragraph 4 of that order - which was described in Re Labranche Securities Litigation 405 F Supp 2d 333 at 340 (S.D.N.Y. 2005) per Sweet DJ as "a useful summary of a specialist's responsibilities and obligations" - provides: A specialist is expected to maintain, insofar as reasonably practicable, a "fair" and "orderly" market. A "fair" market is free from manipulative and deceptive practices, and affords no undue advantage to any participant. An "orderly" market is characterised by regular, reliable operations, with price continuity and depth, in which price movements are accompanied by appropriate volume, and unreasonable price variations between sales are avoided. 95 I am not sure that these take matters very far but they are, at least, informative. It is, I think, impossible to give an exhaustive statement of what is comprehended in the notion of a fair, orderly and transparent market. It suffices for present purposes, however, to observe that it appears to have at least two concepts at its core. One relates to a state of affairs in which all market participants are placed in an equal position such that there is level playing field. The second, which is encompassed by the word "orderly", is the notion of reliable market operations displaying price continuity and depth and in which unreasonable price variations between sales are avoided. I do not think that the pursuit of orderly markets carries with it the eradication of volatile or unpredictable markets. 96 I have set out the market incident above. I do not think that the pattern of trading thereby disclosed could be described as indicating the presence of a market or trading which was not fair or transparent. There was no evidence which suggested that any market participants had an advantage over any other or that the market exhibited inequalities which might be described as unequal or unfair. Nor is there anything which would suggest that the operation of the market was other than transparent. The market log of all trades was available and it was not put, at any point, that there were market events which were concealed or not sufficiently exposed. 97 As to whether the market was disorderly, the applicants called an expert, Associate Professor Ashe, who analysed the entire course of trading in the three minute period. His opinion, which on this topic was not challenged, was that the various price fluctuations which occurred in the markets for the 90 Day September 07, 90 Day December 07, 90 Day March 08 and 3 Year September 07 contracts were explainable by buying and selling pressures and the effect of a number of stop orders. 98 Professor Frino, who is a professor of finance at the University of Sydney, was called by the Exchange and gave this evidence: In conclusion, in my opinion, the price movement in the first 30 seconds following the CPI announcement on 25 July, 2007 were anomalous (i) relative to my expectations for an informed response to a CPI release, (ii) relative to price movements documented for previous CPI announcements, and (iii) relative to the price movement documented by the end of the 3 minute announcement period. 99 He was not challenged on this conclusion either. Indeed, he was not cross-examined at all. I accept his evidence that the trading was anomalous. He also expressed the view that the direction and magnitude of the trading was unprecedented and inconsistent with the price movements expected following an informed response to a CPI release. Essentially he thought that the prices of all three contracts should move in the same direction following such an announcement. He examined the price movements in the contracts between 24 April 2001 and 24 April 2007 following CPI announcements and found, with the single exception of 23 October 2002, that the interest rate futures contracts had all moved in the same direction in the first 30 seconds following each announcement. In the particular case of 23 October 2002, the price movement in a contrary direction was minimal and not of anything like the order with which the present proceedings are concerned. Professor Frino also examined the actual price movements in the three minutes following each such announcement and found a similar, although not as strong, result. He did not express an opinion, as Associate Professor Ashe did, on the actual trading events which occurred in the three minute period. 100 In light of his evidence, which I accept, I conclude that the trading behaviour exhibited in the first three minutes after the announcement was highly unusual, unprecedented over nearly a decade and inconsistent with an informed response to the data. However, I also accept Associate Professor Ashe's opinion that the actual price fluctuations observed were caused by everyday market phenomena. There is no particular contradiction involved in concluding that the events were highly anomalous but nevertheless caused only by ordinary market events: a once in fifty year market event will eventually occur; someone always wins the lottery. The occurrence of such a market anomaly does not, however, indicate the absence of reliable operations nor the absence of price continuity or depth. Markets, from time to time, exhibit chaotic behaviour but without more that does not, I think, render them disorderly. In those circumstances, the trading which occurred did not signal the presence of a market which was not fair, orderly and transparent. Whilst I have no doubt that Mr Raper suspected something irregular had occurred the actual evidence does not bear out his suspicions.

(e) Misapplication of the Error Resolution Policy 101 In their pleadings the applicants contended for the following propositions: (a) the Exchange had failed correctly to carry out the calculation of the fair price value in accordance with cl 2 of the Error Resolution Policy; and (b) the Exchanged had failed to determine the appropriate market integrity range in accordance with cl 6 of the Error Resolution Policy for the relevant interest rate contracts. 102 No submissions were advanced in support of the first argument. I have already set out above cl 2 of the Error Resolution Policy. It does not prescribe a particular method of calculating the fair price value but instead merely lists criteria any of which may be used, alone or in combination, to calculate such a value. The applicants did not advance any argument to suggest that the fair price values calculated by Mr Raper on the contracts upon which he determined a market integrity range had involved the use of criteria outside the scope of cl 2. In any event, because no reports of error trades were lodged the ERP had no application. 103 In those circumstances I consider the first argument no further. 104 As to the second argument, if one merely read paragraph 23K(b) of the third further amended statement of claim one might be left somewhat confused about what was in fact being alleged. However, the argument advanced in the applicants' closing written submissions was that if Mr Raper had calculated a market integrity range for the 90 Day September 2007 contract then a number of trades made by Transmarket would have been cancelled. These trades, as events transpired, were the remaining legs of spread positions acquired on Transmarket's behalf by one of its dealers, a Mr Horth. The evident intent of the argument was to achieve the cancellation of the remaining open legs. It will be recalled, of course, that the 90 Day September 07 contract was regarded by Mr Raper as having traded in an orderly fashion. I have found that whilst Mr Raper did calculate the value of that contract he did not invoke the processes and procedures of cl 1.13.2 and hence no requirement arose for him to calculate the market integrity range for the 90 Day September 07 contract or to cancel any trades in that contract pursuant to cl 1.13.2. That, so it seems to me, must be the end of the matter. If cl 1.13.2 was not activated by Mr Raper it is idle to debate what the legal consequences would have been if it had been. 105 In truth, Transmarket's case is that Mr Raper should have decided that there had been error trades in the 90 Day September 07 contract, should have activated cl 1.13.2, should have determined a market integrity range and should have cancelled the trades falling within that range for that contract. None of these allegations makes any legal sense. Mr Raper's power to determine a market integrity range under cl 1.13.2 was discretionary; even assuming somehow his decision not to use the clause could be impugned there is no legal framework which could result in a determination by this Court either of whether cl 1.13.2 was to be activated or what the appropriate market integrity range for the 90 Day September 2007 contract should have been if it were. That is the insurmountable difficulty confronting the argument. I reject it.

(f) Failure to make available for registration the applicants' spread trades in accordance with the Operating Rules of SFE Clearing Ltd 106 Operating Rule 4.2.1 provides: Transmission by Exchange to SFE Clearing Particulars of all Trades executed on the Trading Platform shall be promptly transmitted by the Exchange to SFE Clearing and shall be available for registration in accordance with the Clearing Rules. 107 The applicants argued that this clause required the Exchange to make available for registration their spread trades. Since I have rejected the argument that spread trades are themselves "trades" to which the Operating Rules directly apply, this argument must fail. It was not put that Operating Rule 4.2.1 had been breached by a failing to permit registration of the cancelled legs.

(g) Denial of the benefit of the contract 108 The applicants contend that there was implied into the contract a term requiring the Exchange to do all such things as were necessary on its part to enable them to have the benefit of that contract. I proceed, for present purposes, on the assumption that there was a contract between each of the applicants and the Exchange whose terms included the Operating Rules although the more likely contract was between the transacting participants, being BrokerOne and UBS, and the Exchange. The applicants pointed to the well-known dictum of Lord Blackburn in Mackay v Dick (1881) 6 App Cas 251 at 263 which is in these terms: [A]s a general rule, … where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect. (emphasis added) 109 The emphasised passage directs attention to the benefit which the applicants seek to derive from the proposed term. It is apparent from paragraph 25B of the third further amended statement of claim that the complaint is that the implied term was breached by the Exchange's actions in only cancelling a single leg of their spread trades in circumstances where it had no power to do so. The particular circumstances relied upon are the applicants' arguments that the Operating Rules did not permit the cancellation of only a single leg, an allegation that the power did not arise because Mr Raper had not been validly appointed as the Trading Manager and an allegation that no power had arisen because the prerequisite opinion had not been formed. Each of those allegations is an assertion that the Operating Rules were breached. The principle in Mackay v Dick has no application to that kind of allegation. The applicants either make good their contention that the Operating Rules were breached in the way they allege or they do not. Mackay v Dick adds nothing to that analysis.

(h) Further implied terms 110 Paragraphs 26-38 of the third further amended statement of claim contained a series of allegations about implied terms. The first set were said to have been implied by s 12ED(1)(a) of the Australian Securities and Investments Commission Act 2001 (Cth) ("ASIC Act") which provides: (1) In every contract for the supply of financial services by a person to a consumer in the course of a business, there is an implied warranty that: (a) the services will be rendered with due care and skill; and (b) any materials supplied in connection with those services will be reasonably fit for the purpose for which they are supplied. 111 The Exchange did not seek to argue that the applicants were not consumers as defined in s 12BC. It did argue that there were no services provided by it to the applicants because the structure of the Operating Rules was such that all services were provided to the relevant participant, in this case, BrokerOne and UBS. It is not necessary to resolve that issue because the contention should be rejected for another reason. Paragraph 28 of the pleading makes clear that the warranty of due care and skill is said to have been breached because the Exchange cancelled the spread trades in a fashion which was contrary to express or implied terms in the Operating Rules. I have concluded that the Operating Rules were breached in only one way and this was because the Exchange cancelled the trades without Mr Raper having formed the opinion which was a condition precedent to their being error trades and hence to the exercise of that power under clause 1.13.2. 112 However, the circumstances in which Mr Raper failed to form that opinion do not bespeak on his part any lack of due care and skill. Indeed, to the contrary, Mr Raper's conduct on the day is not readily susceptible to criticism. He acted in very short compass to deal with a situation of some complexity. His mistake was to have failed to appreciate the proper construction of the error trade provisions. However, as these reasons show, the actual meaning of those rules is contestable and unclear. It is not shown merely by the fact that he was wrong in his understanding of how Exchange generated error trades were to be handled that he was negligent. In truth, if blame is to be put anywhere it should rest with the person who drafted the definition of "error trade" and co-ordinated its poorly executed integration into cl. 1.13.2. 113 The applicants also contended that there had been a breach of the term implied into the contracts by s 12ED(2) of the ASIC Act which provides: (2) If: (a) a person supplies financial services to a consumer in the course of a business; and (b) the consumer, expressly or by implication, makes known to the person: (i) any particular purpose for which the services are required; or (ii) the result that he or she desires the services to achieve; there is an implied warranty that: (c) the services supplied under the contract for the supply of the services; and (d) any materials supplied in connection with those services; will be reasonably fit for that purpose or are of such a nature and quality that they might reasonably be expected to achieve that result, except if the circumstances show that the consumer does not rely, or that it is unreasonable for him or her to rely, on the person's skill or judgment. 114 This warranty will not be implied unless the requirements of subsection (a) and (b) are satisfied. I assume in favour of the applicants that the requirements of subsection (a) can otherwise be satisfied. There are two ways in which the requirements of subsection (b) may be satisfied, namely, by the presence of a particular purpose of the consumer made known to the financial service provider (subsection (b)(i)) or the presence of a result desired by the consumer to be achieved made known to the financial services provider (subsection (b)(ii)). Both limbs of subsection (b) focus on a purpose or desired result of the consumer. 115 The way in which the applicants have put their case is set out in paragraph 31 of the pleading which is as follows: It was an implied warranty of the Contracts that the services provided by the respondent would be of such nature and quality that they might reasonably be expected to achieve that result, namely: (a) the cancellation by the respondent of any spread trades would be carried out only in accordance with the express powers contained in the Operating Rules to do so. (b) the cancellation by the respondent of any spread trades would be carried out in accordance with the procedures set out in the SFE Error Resolution Policy. (c) all executed trades would be made available for registration in accordance with the Operating Rules of SFE Clearing Corporation Pty Ltd. 116 The better view is that this pleading does not make any sense. The reader is left to guess what "that result" means in the opening words of the paragraph. It may be that the pleader is trying to say that matters set out in paragraphs 31(a) to (c) are the "results" referred to in s 12ED(2)(b)(ii) but that is not what it says. Making that assumption that it should be read to be coherent, that case nevertheless cannot succeed. None of the matters set out in paragraphs (a) to (c) can be properly described as "results" within the meaning of s 12ED(2)(b). What that provision contemplates is a situation where a consumer of financial services makes known to a financial services provider a particular result for which the consumer wishes to have the services. The matters set out in paragraphs 31(a) to (c) cannot be described as "results" which the applicants could have been desiring to achieve by their entry into the contract which is the Operating Rules. In any event, there was no evidence from any of the applicants that that the matters in paragraph 31(a) to (c) were the results intended by them to be achieved by entry into those contracts. 117 It was then said that there was a term implied at law that the Exchange would not cancel the applicants' spread trade other than in accordance with the Operating Rules. No such term would be implied as it would be unnecessary. Ex hypothesi, such a cancellation would be contrary to, and a breach of, the Operating Rules: cf. Reinhold v New South Wales Lotteries Corporation [2008] NSWSC 5 at [34] per Barrett J. 118 Finally, it was said that the power of cancellation was subject to an implied term that it would only be exercised reasonably. This argument was eventually developed at paragraph 229 of the applicants' written closing submissions and was said only to require that the applicants' spread trades would not be cancelled other than in accordance with the Operating Rules. There is no utility in implying such a term into the contracts. In any event, even if such a term were implied, nothing Mr Raper did, for reasons which I have already given, was unreasonable.

(i) Claims in tort 119 Three claims in tort were articulated by the applicants. The first was a claim that by cancelling the spread trades the Exchange had converted them. This submission is hopeless; the spread trades were not chattels and it is to chattels rather than intangibles that that tort is directed: see Telecom Vanuatu Ltd v Optus Networks Pty Ltd [2008] NSWSC 1209 at [176]-[184] per Bergin J. 120 The second claim in tort was that the Exchange had been negligent in cancelling the trades. I have already recorded my conclusion that Mr Raper was not to be criticised for his actions. Leaving aside the question of whether a concurrent duty of care could be owed alongside the detailed terms of the Operating Rules there was, in any event, no departure from the standards which could be expected of a reasonable Exchange. 121 The third tort claim was that by cancelling the spread trades the Exchange had induced a breach of contract. The breach of contract identified was that allegedly committed by the counterparties to the cancelled trades. The Exchange pleaded a number of defences including justification. Whether that defence is established must "be left to the tribunal to analyse the circumstances of each particular case": Glamorgan Coal Co Ltd v South Wales Miners' Federation [1903] 2 QB 545 at 577 per Stirling LJ; Whitfeld v De Lauret & Co Ltd (1920) 29 CLR 71 at 83 per Isaacs J. In this case, I conclude that the Exchange was justified in its actions. It is apparent that Mr Raper could validly have cancelled the trades simply by performing the task of calculating the market integrity range informally, forming the opinion that the trades falling in that range were not in the interests of a fair, orderly or transparent market and then, having formed that opinion, cancelling the trades under clause 1.11.1 or 1.13.2. The fact that the trades could very readily have been cancelled by alternate means is an indication that such actions were justified: Edwin Hall & Partners v First National Finance Corporation plc [1988] 3 All ER 801.

(j) Claims based on representations 122 In the applicants' pleading allegations were made that an estoppel arose by reason of a representation by the Exchange that the procedures set out in the Error Resolution Policy formed part of the contracts between the Exchange and each of the applicants. This argument was not advanced in their written or oral submissions and I address it no further. A claim was also made in the pleading that the Exchange had engaged in misleading and deceptive conduct by making the four representations set out in paragraph 56 of the third further amended statement of claim. This raised no new grounds of claim, rather re-ventilating in a different permutation the contention that the Exchange had failed to act in accordance with the Operating Rules, an argument which I have already addressed. Further, no submissions were advanced orally or in writing in support of this contention and I consider it no further.

(k) Direct enforcement of Operating Rules 123 Paragraphs 66-69 of the third further amended statement of claim called in aid of s 793C of the Act as an alternate means of seeking to enforce the Operating Rules. No oral or written submissions were received in support of this contention. I consider it no further.

(l) Unconscionable conduct Section 12CC(1) of the ASIC Act provides: (1) A person must not, in trade or commerce, in connection with: (a) the supply or possible supply of financial services (see subsection (6)) to another person (other than a listed public company); or (b) the acquisition or possible acquisition of financial services (see subsection (7)) from another person (other than a listed public company); engage in conduct that is, in all the circumstances, unconscionable. 124 A number of circumstances are then set out in s 12CC(2) which may be taken into account in determining whether conduct answers that description. It provides: (2) Without in any way limiting the matters to which the court may have regard for the purpose of determining whether a person (the supplier) has contravened subsection (1) in connection with the supply or possible supply of financial services to another person (the service recipient), the court may have regard to: (a) the relative strengths of the bargaining positions of the supplier and the service recipient; and (b) whether, as a result of conduct engaged in by the supplier, the service recipient was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and (c) whether the service recipient was able to understand any documents relating to the supply or possible supply of the financial services; and (d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the service recipient or a person acting on behalf of the service recipient by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the financial services; and (e) the amount for which, and the circumstances under which, the service recipient could have acquired identical or equivalent financial services from a person other than the supplier; and (f) the extent to which the supplier's conduct towards the service recipient was consistent with the supplier's conduct in similar transactions between the supplier and other like service recipients; and (g) if the person is a corporation - the requirements of any applicable industry code (see subsection (11)); and (h) the requirements of any other industry code (see subsection (11)), if the service recipient acted on the reasonable belief that the supplier would comply with that code; and (i) the extent to which the supplier unreasonably failed to disclose to the service recipient: (i) any intended conduct of the supplier that might affect the interests of the service recipient; and (ii) any risks to the service recipient arising from the supplier's intended conduct (being risks that the supplier should have foreseen would not be apparent to the service recipient); and (j) the extent to which the supplier was willing to negotiate the terms and conditions of any contract for supply of the financial services with the service recipient; and (ja) whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the service recipient for the supply of the financial services; and (k) the extent to which the supplier and the service recipient acted in good faith. 125 The applicants contended that they had proceeded on the basis that the respondent would only cancel the spread trades in accordance with the express powers contained in the Operating Rules. They pointed to the fact that the Exchange was responsible for, and had complete control over, the process of cancelling spread trades and that the applicants, correspondingly, had no control over that process. They noted in particular, the vulnerability which was said to arise from their inability to protect themselves from the consequences of the Exchange's cancellation of their spread trades. They also relied upon their inability to negotiate any changes or amendments to the terms of the Operating Rules. 126 Contrary to those submissions I discern nothing in the conduct of the Exchange which remotely might come within the provisions of s 12CC(1). The word "unconscionable" in s 12CC(1) is not constrained by the common law's or equity's understanding but it is to be given its ordinary meaning: Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132 at 140 [30] per Tamberlin, Finn and Conti JJ. "Unconscionable" means showing no regard for conscience. Conduct will not infringe s 12CC(1) unless there is shown in the respondent's conduct something which is properly able to be described as lacking in conscience. 127 The wisdom of giving statutory force to such ill-defined moral precepts which of their nature are likely to vary between different people and judges may seriously be questioned. Further, common experience with litigation shows that the prescription of such vague and contestable standards is apt to multiply disputation and prolong litigation whilst parties debate the application of a rule whose content is not only obscure but illusive. Worse, because most parties in litigation regard themselves as being in the right, the insertion of a standard resting on a moral precept such as conscience is likely to mean that each side sees such a provision as assisting it. A less wholesome incentive to the reduction of litigation is difficult to imagine. 128 Be that as it may, the role of this Court is to apply the standard thus prescribed. Contrary to the applicants' submissions I can discern nothing unconscionable in the actions of the Exchange. Mr Raper was confronted with a market behaving in a highly anomalous fashion. He was aware that the Exchange had a statutory obligation to ensure the operation of a fair, orderly and transparent market. He made, in good faith, a particular judgment call. There was nothing capricious, malicious, wanton or exploitative about Mr Raper's actions. Applying the statutory test of unconscionable conduct I cannot describe his or the Exchange's conduct as possessing that quality.

(m) The 12 second issue 129 The Exchange's written submissions indicated that there was a disputed issue as to whether Mr Raper should have determined that the market incident began at 11.30.12am rather than at 11.30.00am. The Exchange saw this as being of significance because it was "important to the case of the applicants because many of the trades that they make a claim in respect of were executed in that period". There is no doubt that certain parts of the evidence touched upon this topic. For example Mr Raper was cross-examined about it at some length and Associate Professor Ashe gave evidence that the market had behaved normally for the first 12 seconds following the announcement (Associate Professor Ashe also claimed that the market had returned to order by no later than 11.32.00am, which is earlier than Mr Raper's assessment, but nothing in this proceeding turned on this). However, I can perceive no pleaded case to which this issue might attach. Paragraph 23K of the third further amended statement of claim makes various allegations about the manner in which the Error Resolution Policy was applied but none of them includes an allegation that Mr Raper should have determined that the market incident commenced 12 seconds earlier than it did. Further, there was no written or oral submission to that effect made on the applicant's behalf. In those circumstances I need not resolve the issue.

(n) Whether the applicants are entitled to sue 130 The contracts upon which the applicants relied were the statutory contracts between BrokerOne and UBS, as participants, and the Exchange. The applicants contended that these contracts had been entered into on their behalfs as undisclosed principals. 131 The Exchange submitted that BrokerOne and UBS did not enter into the Operating Rules in a way which made the applicants a party to them. Consequently, there was no privity of contract between the applicants and the Exchange and their claim in contract, therefore, had to fail along with their claim in tort. 132 The Exchange's submissions are to be preferred. At the level of theory, it is of course possible that BrokerOne and UBS could have entered into the Operating Rules as the undisclosed agent of the applicants so that they might have become a party to the Operating Rules. It is just as theoretically possible that BrokerOne and UBS entered into the Operating Rules as principals in their own right and in a way which did not have the effect of bringing the applicants into privity of contract with the Exchange. The relevant principles were set out by the Full Court (Beaumont, Gummow and Einfeld JJ) of this Court in Australian Trade Commission v Goodman Fielder Industries Ltd (1992) 36 FCR 517 at 521-522 in these terms: Before turning to the particular statutory provisions which have given rise to the questions of law that are before us, it is appropriate to refer to some settled propositions of the law of principal and agent. In Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd [1968] 2 QB 53 at 59-60 Donaldson J said that an agent can conclude a contract on behalf of his principal in one of three ways: (a) By creating privity of contract between the third party and his principal without himself becoming a party to the contract. (b) By creating privity of contract between the third party and his principal, whilst also himself becoming a party to the contract. (c) By creating privity of contract between himself and the third party, but no such privity between the third party and his principal. In considering the issues which arise on this appeal it will be important to bear in mind, in particular, category (b). Donaldson J's decision, as regards questions of agency, was affirmed by the Court of Appeal: see Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd [1968] 2 QB 545. Earlier, in Montgomerie v United Kingdom Mutual Steamship Association Ltd [1891] 1 QB 370 at 372 Wright J said, describing it as an important proposition, that: "[I]n all cases the parties can by their express contract provide that the agent shall be the person liable either concurrently with or to the exclusion of the principal, or that the agent shall be the party to sue either concurrently with or to the exclusion of the principal." The effect of the authorities was summed up by Mr F M B Reynolds in Chitty on Contracts (25th ed, 1983), Vol 2, Ch 1. Mr Reynolds wrote (par 2274): "The fact that a person is an agent and is known to be so does not, however, of itself necessarily prevent him incurring personal liability. Similarly he may be entitled to sue. Whether this is so is to be determined by the construction of the contract, if written, and by its nature and the surrounding circumstances. When the agent does contract personally the scope of the contract which he makes requires careful analysis. He may undertake sole liability to the exclusion of his principal: conversely he may undertake joint liability on the main contract together with his principal. He may act as surety for his principal, or enter into a collateral contract with its own terms. The possibilities shade into one another, and there is no general rule." See also the commentary by the same author on Art 105 of Bowstead on Agency (15th ed, 1985), pp 426-429, and Scott v Geoghegan & Sons Pty Ltd (1969) 43 ALJR 243 at 245, per Taylor J. 133 Granted that that be so, the question then is to determine what these particular parties did. I have no doubt that the contractual documentation shows the applicants' contentions in this regard to be unfounded. The Operating Rules bound BrokerOne, UBS and the Exchange by paramount statutory force. As full participants BrokerOne and UBS's trading rights were conferred by Operating Rule 2.2.6 which provided: A Full Participant shall: … (b) be responsible for all orders entered into the Trading Platform and become a party to each trade; … 134 As party to each trade, BrokerOne and UBS agreed with the Exchange that it would not recognise any trust therein. Operating Rule 2.1.5 provided: Except as required by Law, no Participant shall be recognised by the Exchange as holding its rights as a Participant upon any trust and the Exchange shall not be bound or compelled in any way to recognise (even where it has notice thereof) any equitable contingent future or partial interest in any rights or entitlements in respect of any Participant, except an absolute right to the entirety thereof. 135 The Operating Rules went further than this, however, for they required BrokerOne and UBS to include particular terms in any agreement they had with their clients: Operating Rule 2.2.25 (provided above). BrokerOne and UBS complied with that obligation as the agreements it had with the applicants show (subject to my remarks above at paragraph 16). 136 The following emerges clearly: (a) the Exchange intended, by the Operating Rules, that clients would not have any entitlement to sue under those Rules; (b) BrokerOne and UBS, by taking up their position as Full Participants, agreed precisely to that regime; and (c) the applicants, as clients, agreed to that regime by executing the relevant broker agreements with BrokerOne and UBS. 137 The question then is whether it can be concluded in light of those matters that BrokerOne and UBS's entry into the Operating Rules can have brought the Exchange and the applicants into privity of contract. The answer to that question is clearly no - that is the precise opposite of what was intended by all parties and is exactly what the documents do not say. 138 There are four matters that should be noted for completeness. First, at paragraph 111 of its written submissions the Exchange appeared to submit that the applicants failed because they were not parties to the relevant futures contracts. That case was not pleaded and, as the applicants pointed out, is irrelevant since they are not suing on those contracts. 139 Secondly, the applicants relied upon a number of cases concerned with undisclosed principals. There is no need to set them out, so it seems to me, as there is little dispute about the relevant principles. I will, however, set out the reference the applicants made to the judgment of Lord Lloyd of Berwick in Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 at 207: For present purposes the law can be summarised shortly. (1) An undisclosed principal may sue and be sued on a contract made by an agent on his behalf, acting within the scope of his actual authority. (2) In entering into the contract, the agent must intend to act on that principal's behalf. (3) The agent of an undisclosed principal may also sue and be sued on the contract. (4) Any defence which the third party may have against the agent is available against his principal. (5) The terms of the contract may, expressly or be implication, exclude the principal's right to sue, and his liability to be sued. The contract itself, or the circumstances surrounding the contract, may show that the agent it the true and only principal. 140 This establishes what might otherwise be thought to be obvious, namely, that the terms of the bargain between the applicants and BrokerOne and UBS are determinative of the matter. The applicants' closing submission about this was as follows: In entering into each of the trades here, the brokers (BrokerOne and UBS) intended to act on the Applicants' behalf. 141 That, of course, is precisely what those contracts do not say. 142 Thirdly, the contracts constituted by the Operating Rules were entered into by the brokers at a time which was antecedent to their entry into the relevant broker agreements with each of the applicants. It is very difficult to see, as a matter of practical reality, how those contracts can be seen retrospectively as having been entered into on behalf of the present applicants. 143 Fourthly, although it follows that I accept the Exchange's submission that the applicants can have no standing to sue for breach of the Operating Rules, I am less certain that this necessarily entails the failure of any claim in tort brought by them. Since I have concluded that the Exchange has no liability in tort, there is little to be gained by exploring the difficult questions arising from the alleged existence of concurrent duties in tort and contract. 144 The Exchange also sought to rely upon Operating Rule 1.5.1(b). That Rule is entitled "Limitation of Liability" and provides: The Exchange will not accept or bear any liability whatsoever in respect of any act done or omitted, in good faith and in the performance or purported performance of a function or power conferred on it by the Corporations Act or by any other legislative instrument or direction of any legislature or government authority having jurisdiction over it. 145 The Exchange's submissions about this were brief appearing as a single sentence in the Exchange's written opening submissions and almost as a footnote to an argument based on Operating Rule 2.2.25(d) in its closing written submissions. That written submission was as follows: SFE has at para 38 of its Defence specifically pleaded that OR 2.2.25(d), which must be remembered has statutory force, provides that the Applicants have no rights in respect of the cancelled trades against anyone but their Nominating Participants, aside from the general prohibition from relief contained in OR 1.5.19(b) [sic] pleaded at para 37 of the Defence. 146 The applicants made no submissions about paragraph 37 of the Exchange's defence. Subsequently, I sought further submissions from the parties about its operations. The applicants denied that such a case had been run, however, after a brief fusillade of correspondence, that applicants' withdrew that submission. I would in any event have rejected it. The case appeared in the Exchange's defence and in their written submissions. 147 There was no doubt that Mr Raper was purporting to exercise powers conferred by Operating Rule 1.11.1 and 1.13.2. In both cases those rules had as their end the attainment of a fair, orderly and transparent market. In the case of Operating Rule 1.11.1(b) this is apparent from the text of the rule itself which specifically conditions the Trading Managers' powers on the formation by him of an opinion that a particular trade is not "in the best interests of a fair, orderly and transparent market". In the case of Operating Rule 1.13.2 the same conclusion is to be drawn although in that case the concept of the fair, orderly and transparent market derives from the definition of the market integrity range and error trade found in the dictionary and used in the clause. I mention the connection between those powers and the concept of the fair, orderly and transparent market because one of the functions conferred upon the Exchange by s 792A of the Corporations Act is "to the extent that it is reasonably practicable to do so, do all things necessary to ensure that the market is a fair, orderly and transparent market." 148 The immunity conferred by Operating Rule 1.5.1(b) will be engaged, therefore, when the act in question: (a) takes place in good faith; (b) in the performance or purported performance of a function or power; (c) conferred by the Corporations Act or other legislative instruments. 149 For reasons already given, I have no doubt that Mr Raper at all times acted in good faith. I reject as baseless and inappropriate the applicants' contentions to the contrary. I have concluded that his decision to cancel the trades was not authorised by Operating Rule 1.11.1 or 1.13.2 so that whatever else might be said, his actions under them must be described as "purported". The powers purportedly exercised by Mr Raper, however, were powers conferred by the Operating Rules and not by the Corporations Act. To the extent that Operating Rule 1.5.1(b) applies to powers it is, therefore, inapplicable. 150 But, Operating Rule 1.5.1(b) not only applies to powers but also to functions. One of the functions which the Exchange had by reason of s 792A was to do all things necessary to ensure that the market was fair, orderly and transparent. No doubt the putting in place by the Exchange of its Operating Rules served, in part, as a discharge of the function conferred by s 792A. No doubt also the appointment of Mr Raper to the office of Trading Manager can likewise be seen as a performance of the same function. The critical question which arises is whether Mr Raper's actions in failing to form the requisite opinion and thereafter in purporting to cancel the trades under the terms of the Operating Rules can be described as the performance of the function conferred by s 792A. 151 As a matter of fact, I do not doubt that Mr Raper understood himself at all times to be doing whatever was necessary to ensure that the market operated in a fair, orderly and transparent way. The achievement of that aim is properly to be characterised as being the discharge of one of the functions conferred by s 792A. Further, the failure to form the requisite opinion was an omission within Operating Rule 1.5.1(b) just as the cancellation of the trades were acts within the meaning of the same rule. Those conclusions entail the applicability of the immunity conferred by Operating Rule 1.5.1(b). The consequence is that that rule is a complete answer to any liability the Exchange may have arising from a breach of the Operating Rules. 152 For completeness I should note that I have considered whether Operating Rule 1.5.1(b) should be subject to a stricter reading being a limitation on liability propounded by the Exchange. I do not think that it should be. The Operating Rules themselves are creatures of statute. Their existence is implicitly required by the terms of s 792A(c); the Minister is authorised to disallow them under s 793E and their legal effect as a contract under seal springs entirely from s 793B. It is appropriate therefore to describe the contracts thereby arising as statutory ones. Generally, such contracts should not to be construed the way that ordinary contracts are construed. The reasons for this are several but include the inability of the parties to control the terms of their bargain and the corresponding irrelevancy of their intentions. Speaking of the Lotto Rules (another statutory contract) Clarke JA in Brown v Petranker (1991) 22 NSWLR 717 said at 722 (Handley JA and Waddell AJA agreeing): The Court is not dealing with a contract freely negotiated between two parties. On the contrary, while it can be accepted for present purposes that upon the facts alleged by the respondent the appellants came under a duty which may be described as contractual to send the validated coupon to the Lotto offices, the relationship between the parties was governed by an Act of Parliament and rules passed thereunder which imposed the terms and conditions under which the duty arose. The question which arises is not the same as the one which arises in the construction of a written private agreement. In that instance the Court is concerned to ascertain the presumed intention of the parties from the written words. In the present case the Court is concerned with the proper interpretation of a rule passed pursuant to a rule making power contained in an Act of Parliament. 153 Subsequently at 722 Clarke JA said that the task confronting the Court was "to construe the rule in accordance with well-established principles of statutory construction". Approaching the matter that way there is no warrant, as might otherwise be the case in a clause such as Operating Rule 1.5.1(b), to read the immunity thus conferred in a restricted fashion. In that circumstance, there is no reason to apply principles concerned with contractual exclusion clauses as the applicants submitted: eg. Sydney Corporation v West (1965) 114 CLR 481; Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500. I reject also the applicants' argument that Operating Rule 1.5.1(b) could not apply because Mr Raper had no power to cancel the trades. That submission simply ignores the word "purported". Finally, I reject the argument that the Exchange has not proven the facts showing the clause applies. It has.

(o) Loss and damage 154 Against the possibility that a different view might be taken on appeal I turn then to the question of damages. The loss and damage claimed by the applicants was set forth in the report of Associate Professor Ashe. He considered the losses of the applicants to fall into two different categories. The first concerned the situation where a trader, confronted with the cancellation of one of the legs of his spread, acquired another position to restore the spread which had previously existed. The second was the situation where a trader, confronted with the cancellation of one leg of the spread, closed out the remaining leg. The Exchange advanced no substantive disagreement with this approach. It did not submit that the damages flowing from the contract case based upon the obligation of the Exchange to cancel an entire spread position might differ from those applicable when the obligation was said to be not to cancel the leg at all. 155 Transmarket's claims for damages rested upon spread positions acquired by four of its traders Messrs Moses, Barry, Horth and McKeon. Associate Professor Ashe calculated the damages arising from the position adopted by Mr Moses at $166,328. Mr Moses had acquired two spread positions between 11.30.07am and 11.30.08am. The first was a spread position constituted by the purchase of 180 3 Year September 07 contracts and the sale of 200 90 Day March 08 contracts at a price differential of -0.375. The second spread position was identical except at a price differential of -0.37. In the events which transpired, the Exchange cancelled 400 90 Day March 08 contracts being the entirety of Mr Moses' short position. That left him with 360 3 Year September 07 contracts. He then sold 360 3 Year September 07 contracts to close out his position. Associate Professor Ashe calculated the original buy value of the 360 3 Year September 07 contracts at $35,754,816 and the later sale value of the 360 3 Year September 07 at $35,588,488. The difference between these two figures was $166,328 which I accept is the relevant loss. 156 Mr Barry of Transmarket had, at 11.30.08am, purchased 90 3 Year September 07 contracts and sold 100 90 Day March 08 contracts at a price differential of -0.31. The Exchange cancelled the 100 90 Day March 08 contracts leaving Mr Barry long 90 3 Year September 07 contracts. Mr Barry then went short 90 3 Year September 07 contracts to close out the position. Associate Professor Ashe calculated the damages arising from Mr Barry's position at $37,353 being the difference between the purchase value of the 90 3 Year September 07 contracts of $8,934,475 and the later sale value of the 90 3 Year September 07 contracts of $8,897,122. I accept this assessment. 157 The third Transmarket trader was Mr Horth. Between 11.30.06am and 11.30.12am Mr Horth acquired two spread positions. The first consisted of a 500 contract long position in 90 Day September 07 contracts and a 500 contract short position in 90 Day December 07 contracts at a price differential of 0.07. The second spread position was identical except at a price differential of 0.06. The Exchange cancelled 1,000 90 Day December 07 contract leaving Mr Horth long 1,000 90 Day September 07 contracts. He subsequently sold 1,000 90 Day September 07 contracts at a price of 93.37 (the quoted price is formatted as 100 minus the yield to maturity). There was some confusion in the applicants' case whether this was to be seen as a loss flowing from the closing out of a position or a loss flowing from seeking to restore a damaged spread. Regardless, the Exchange accepted Associate Professor Ashe's calculation of damages on a "close-out" basis despite Mr Horth actually implementing a strategy to restore his spread position, stating that nothing flowed from the error. 158 The original buy value of the 1,000 90 Day September 07 contracts was $984,298,216 and the later sale value of the 1,000 90 Day September 07 contracts was $983,915,011. The loss suffered was therefore $383,205 (being the difference). 159 The fourth Transmarket trader was Mr McKeon. The facts concerning Mr McKeon are as follows. At 11.30.29am he executed spread trades buying 84 3 Year September 07 contracts and selling 30 10 Year September 07 contracts. The Exchange cancelled the 84 3 Year September 07 contracts. This left Mr McKeon short 30 10 Year September 07 contracts. At 12.00.02pm he then went long 30 10 Year September 07 contracts which closed his remaining long position in the 10 Year September 07 contracts. There is no dispute that the closing out of his position in the 10 Year September 07 contracts resulted in a profit of $11,061. Transmarket has propounded three different versions of its loss in relation to Mr McKeon's trades. The first of these may be found in Associate Professor Ashe's report. That analysis assumes that Mr McKeon's action in response to the cancellation was to buy 84 3 Year September 07 contracts at 93.57 "to reinstate the position". By reinstating the position Associate Professor Ashe meant that Mr McKeon was seeking to reconstruct the spread which had ceased to exist upon the Exchange's cancellation of the 3 Year September 07 leg. That hypothesis is not supported by Mr McKeon's evidence which was that his response to the cancellation of the 3 Year September 07 leg was to buy 30 10 Year September 07 contracts (not 84 3 Year September 07 contracts). I therefore reject Associate Professor Ashe's analysis. I say for completeness that if, in fact, Mr McKeon had bought 84 3 September 07 contracts at 93.57 (as he assumes) I accept his arithmetic and the concomitant conclusion that a loss of $46,559 would have been suffered. However, this is not what occurred. 160 The second version of the loss claimed by Transmarket for Mr McKeon's trades is to be found in its written submissions. This version does not bring to account the profit made by him on the closing out of his position in the 10 Year September 07 contract. It does not assume, as Associate Professor Ashe did, that he would have bought 84 3 Year September 07 contracts at 12 o'clock. Instead the submission was: Mr McKeon's loss has been calculated on the basis that, if the original long position in the 3 Year Sep 07 had not been cancelled, the spread would have been closed out at that time (12.00.02pm). 161 Mr McKeon, however, gave no evidence that this is what he would have done and I do not see how it can be said that the spread would have been closed out at noon. There is also a question as to whether expectation damages can be obtained given that the applicants submitted on 6 May 2010 that "the applicants do not claim 'expectation' damages or loss of profits". 162 The third version of the loss suffered by Mr McKeon was set out in the applicants' submission in reply at paragraphs 26-28. These submissions proceeded on the basis that the Court should conclude that Mr McKeon would have closed out the spread. The actual submission was: It cannot be said on the evidence that he would have closed out that spread trade prior to 12.00.02pm because in fact he did not. He was not cross-examined to suggest otherwise. …. Mr McKeon's loss has been calculated on the basis that, had the 84 3 Year Sep 07 legs of the spread trade not been cancelled, the spread trade would not have been closed out until 12.00.02pm. 163 I reject this argument. Mr McKeon's evidence was that his response to the calculation of the trade was to close out the remaining leg, that is, the remaining short position of 30 10 Year September 07 contracts. There is no evidence to support the notion that he would have closed out at 12 o'clock or at any other time, his original spread position. In those circumstances I conclude that the evidence only shows that Mr McKeon made a profit of $11,061 as a result of the cancellation. In those circumstances the applicant Transmarket is not entitled to any compensation in respect of his trading. 164 Accordingly, had I otherwise been of the view that Transmarket was entitled to compensation I would have awarded it damages of $586,886. 165 I turn then to the position of the applicant Kestrel. At 11.30.06 its trader Mr Fleming executed a spread trade buying 180 3 Year September 07 contracts and selling 200 90 Day March 08 contracts ("the first spread"). He executed another spread position at 11.36 buying 200 90 Day December 07 contracts and selling 200 90 Day March 08 contracts ("the second spread"). Both spread positions were acquired before Mr Fleming was aware that any of the trades were under investigation. At 12.03.28 the Exchange cancelled the 200 90 Day March 08 leg of the first spread position. Following that cancellation Mr Fleming held three positions: (a) he was long 180 3 Year September 07 contracts (from the first spread); (b) he was long 200 90 Day December 07 contracts (from the second spread); (c) he was short 200 90 Day March 08 contracts (from the second spread). 166 The trades in (b) and (c) constituted a spread position and had been, as noted already, acquired simultaneously before he was aware of any cancellations. That spread position was not affected by the cancellation. Mr Fleming's affidavit evidence was that upon the cancellation of the single leg of the first spread he entered into three "outright trades" to "close out" that position. Two of those outright trades were, in fact, the two legs of the second spread. They were, in that circumstance, neither outright trades nor, since they were executed at 11.36am, were they in response to the cancellation of the leg of the first spread as that did not occur for another 27 minutes. The third "outright trade" was the sale of 200 90 Day December 07 contracts which occurred at 1.53pm. Under cross-examination Mr Fleming said that what he meant by his evidence was that he wished to "re-establish his position". This is the opposite of closing out the remaining leg. There is, therefore, a direct conflict between Mr Fleming's oral and written evidence. Mr Gleeson's cross-examination of Mr Fleming understandably did not explore the reasons for this discongruity. He sought to have Mr Fleming accede to the proposition that the 1.53pm trade was "unconnected" to the first spread position, however this was not accepted. If Mr Fleming had acceded to that proposition it would have undermined his oral testimony that the later trading had as its purpose the re-establishment of the earlier spread. 167 Not without some hesitation I have come to the conclusion that Mr Fleming's oral evidence should be accepted. For reasons shortly to be explained it makes sense. The uncertainty in my mind about his oral testimony about re-establishing the spread was assuaged, in part, by his re-examination which indicated that he regarded re-establishment of the spread and closing out as related, if not identical, activities. 168 I accept, therefore, that in order to close out the outright risk that he had on the remaining leg of the first spread he sought to restore his original position. In order to do that he needed, therefore, to be short 200 90 Day March 08 contracts. In fact, he was already short 200 90 Day March 08 contracts by reason of the short leg of his second spread. To make that short position available he, therefore, closed out the long leg of the same spread, ie. he sold 200 90 Day December 07 contracts at 1.53pm. With those two remaining positions he had in effect restored the first spread (although, no doubt, with different differentials). 169 The Exchange made five submissions. First, it said that the positions held by Mr Fleming at 11.36am could not be said to be causally connected to the cancellation of the earlier trades. I accept that submission as correct. Secondly, it was said that the second spread position involved a different contract to the first spread position; I accept this submission too. Thirdly, it was said that the selling at 1.53pm of 200 90 Day December 07 contracts simply closed out Mr Fleming's original long position established at 11.36am; I accept this submission. Fourthly, it was said that the cancellation by the Exchange of trades in the 90 Day March 08 contracts did not give rise to any outright risk in respect of the 90 Day December 07 contracts acquired at 11.36am; I accept this submission. 170 Finally, the outright risk that was created from the cancellation of the trades in the first leg of the original spread position was in relation to the 3 Year September 07 contracts. It was said that Mr Fleming gave no evidence as to whether this position was subsequently closed out at a profit or at a loss. I accept this submission too. However, I have nonetheless come to the conclusion that Kestrel has suffered loss and is entitled to recover. Associate Professor Ashe's approach to the assessment of damages specifically proceeded on the basis that loss could be claimed in two ways; first, by measuring the cost of closing out an uncancelled leg; secondly, by measuring the cost of re-establishing the original spread position by acquiring a new leg to replace the cancelled leg. The Exchange did not seek to contradict the availability of either of those methods of assessing damages. 171 The position taken by Mr Fleming was one which sought to restore the integrity of the spread which had been cancelled. In order to restore that spread it was necessary for him to sell 200 90 Day March 08 contracts (the cancelled contracts). There were, as events transpired, two ways such a position could be acquired by Kestrel. First, he could have gone into the market and simply sold them. Secondly, if he already held such a position he could use it to restore the missing leg. As events transpired he did hold such a position but it was tied up in another spread position. It could be released from that spread by closing out the other leg to the second spread. The closing out of the corresponding leg in that second position in order to make available a short position in 200 90 Day March 08 contracts is to be seen as another way of obtaining a position in order to complete, or repair, the first spread position. Although a little complex it was not a way of proceeding which could be described as unreasonable, as Associate Professor Ashe pointed out. In those circumstances Kestrel is entitled to the damages it seeks. 172 Associate Professor Ashe calculated the value of the 200 90 Day March 08 contracts which had been originally sold at $196,768,681 and the value of the 200 90 Day March 08 contracts sold during the establishment of the second spread position created at 11.36am at $196,697,105. The difference between the original sale value and the later sale value was a loss of $71,576. The value of the 90 Day December 07 position constituting the long leg of the second spread position was $196,740,044, whilst the value of the sale of that position was $196,725,729, a negative difference of $14,315 and making for a total loss of $85,891. Had Kestrel otherwise been entitled to relief I would have given it judgment for that sum. 173 The position of Biskra is straightforward. Its trader was Mr Robinson. Between 11.30.06am and 11.30.08am Mr Robinson executed spread trades buying 270 3 Year September 07 contracts and selling 300 90 Day March 08 contracts. Associate Professor Ashe's report suggests at one point that only 262 3 Year September 07 contracts were acquired. More curiously, Mr Robinson's affidavit of 27 May 2008 suggests at one point only 180 3 Year September 07 contracts were acquired. Despite this, it was accepted by both parties that Mr Robinson purchased 270 3 Year September 07 contracts. At 11.31.09am he executed spread trades buying 100 90 Day December 07 contracts and selling 100 90 March 08 contracts. The Exchange cancelled 400 90 Day March 08 contracts which left him long 270 3 Year September 07 contracts and long 100 90 Day December 07 contracts. He then sought to close out those positions by selling 270 3 Year September 07 contracts and 100 90 Day December 07 contracts. Those two actions resulted in losses of $141,813 being the sum of $125,108 and $16,705. The $125,108 figure was calculated by deducting the original buy value of the 270 3 Year September 07 contracts, $26,816,474, from the later sale value of the 270 3 Year September 07, $26,691,366. The sum of $16,705 was calculated by deducting the buy value of the 90 Day December 07 contracts, $98,386,727, from the sale value of the 90 Day December 07 contracts, $98,370,022. Had I otherwise been of the view that Biskra was entitled relief I would have entered judgment for it in the sum of $141,813. 174 The applicants also claimed exemplary damages. Nothing approaching the threshold for the award of such damages was indicated on the face of these proceedings. All that Mr Raper sought to do was to apply the Operating Rules as he understood them. There is support for the proposition that exemplary damages may not be awarded for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are available: Restatement (Second) of Contracts (1979) s 355; Thyssen Inc v SS Fortune Star 777 F 2d 57 at 63 (2nd Cir, 1985) per Friendly J (cited in Gray v Motor Accident Commission (1998) 196 CLR 1 at 7 [13] per Gleeson CJ, McHugh, Gummow and Hayne JJ). That can scarcely be said to be so in this case. In any event, an award of exemplary damages will not be made unless there is "conscious wrongdoing in contumelious disregard of another's rights": Whitfeld v De Laurent & Co Ltd (1920) 29 CLR 71 at 77 per Knox CJ; XL Petroleum (NSW) Pty Ltd v Caltex Oil (Australia) Pty Ltd (1985) 155 CLR 448 at 471 per Brennan J; Gray v Motor Accident Commission (1998) 196 CLR 1 at 7 [14] per Gleeson CJ, McHugh, Gummow and Hayne JJ. There was nothing in the material before this Court which provided any basis for this claim for such damages, which I reject.

Result 175 The application should be dismissed with costs.

Rulings on Evidence 176 On the fourth day of the trial the applicants called Associate Professor Ashe to give evidence. Associate Professor Ashe had sworn an affidavit on 4 May 2009 and exhibited to that affidavit was a report prepared by him, also dated 4 May 2009. The Exchange objected to the receipt of this evidence. After hearing extensive argument I rejected certain parts of the report and admitted others. These are my reasons for taking that course. 177 Associate Professor Ashe at the beginning of his report recited nine questions which were posed by the applicants' solicitors for his opinion. The report is structured in such a way that each of those questions is then answered in a series of paragraphs in the balance of the report. The main body of the report is itself 89 pages. The objections raised by the Exchange were general but also specific in relation to particular questions. There is, therefore, no substitute but to examine each question separately. 178 The first question posed for Associate Professor Ashe's opinion was as follows: How did the futures market operated by the SFE work as at July 2007, including what meaning was ordinarily attributed to the following terms and expressions by participants in the interest rate futures market conducted by the SFE at that time: (a) "order" and "trade"; (b) "outright order" and "outright trade"; (c) "spread order" and "spread trade"; (d) "fair, orderly and transparent market". 179 The Exchange objected to the relevance of any answer by Associate Professor Ashe to that question and they objected to his qualifications to express such an opinion. As to the first matter, a significant part of the case advanced by the applicants at the trial was that those words had a specialised meaning within the "industry" and that that specialised meaning could assist in the construction of the Operating Rules. I have, as events have transpired, found little assistance in construing the Operating Rules by reference to any such an industry understanding. However, expert evidence about the meaning of the trade terms was capable of being relevant to that argument. 180 That conclusion does not, however, assist in relation to the construction of the expression "fair, orderly and transparent market". There was no reason to think that that expression had a specialised trade meaning hence there was no reason to think that traders, on a day to day basis, were in the habit of using it. I concluded, therefore, that Associate Professor Ashe's opinion about the meaning of that expression could not be relevant. The Exchange also objected to Associate Professor Ashe's qualifications to express opinions about the meaning of the trade terms. It submitted that he neither had any experience nor any professional qualifications which would permit him to express such an opinion. I reject this argument. Associate Professor Ashe holds his position at the Applied Finance Centre at Macquarie University and his research areas include financial risk management. His practical experience has included a period as the portfolio manager at County Investment Management Structured Investments Group and his asset liability and financial risk management work for that firm included the use of derivatives. He also served as the Executive Director of Condell Vann & Co which is apparently a boutique advisory firm and in that capacity provided extensive consulting on the new electricity market and, in particular, advice on the characteristics of the Australian derivatives market. 181 I do not thing that this necessarily gives Associate Professor Ashe a great deal of expertise in the meaning of market terms but I am satisfied that he has the qualifications to express an opinion about them. For those reasons, I admitted his answers to question 1(a), (b) and (c) but rejected his evidence in answer to question (d). Accordingly, I rejected paragraphs 76-85 of his report. 182 The second question was as follows: Provide my observations about the pattern of trading activities, including probable causative factors, exhibited by prices in the following contracts during the period from 11.30.00am to 11.33.59am on 25 July 2007 (the "Incident Period"): (a) September '07 10 Year Bond contract (SFE code: XTU7) (b) September '07 3 Year Bond contract (SFE code: YTU7) (c) September '07 90 Day Bill contract (SFE code: IRU7) (d) December '07 90 Day Bill contract (SFE code: IRZ7) (e) March '08 90 Day Bill contract (SFE code: IRH8) in particular but not limited to, my opinion as to whether at any time during this period the market ceased to be "fair, orderly and transparent". 183 Associate Professor Ashe undertook, in answer to that question, detailed analysis of the trading log and, having done so, reduced the market movements to detailed graphs. He expressed opinions about the cause of the observed market movement. I see no reason why Associate Professor Ashe was not qualified, given his finance and derivatives background, to give evidence of that kind. Accordingly, I admitted paragraphs 86-94 which dealt with that first part of question 2. 184 The question of whether the trading which ensued could itself be described as "fair, orderly and transparent" is, on the other hand, a question of applying a set of known facts to specified legal standard to be found in the Operating Rules. It requires, as a first step, the determination by this Court of a legal question, viz, the meaning of the expression and then the application of that standard to the given facts. Associate Professor Ashe's opinion cannot assist in that endeavour. Accordingly, I rejected the first sentence of paragraph 95, the first sentence of the second paragraph of 96(b)(i), the sentence "the market did not cease to be orderly by reason of these events and transactions" appearing in subparagraph (c) on page 1333, the same words from subparagraph (d)(i) on the same page, the same words in subparagraph (d)(ii) at the top of page 1334, the whole of paragraph 98, the whole of paragraph 100(f) and the whole of paragraph 101. 185 Question three was as follows: Was there any basis upon which any of the contracts or trades executed during the Incident Period, and subsequently cancelled by the SFE (the "Cancelled Contracts"), could reasonably be regarded as not being in the best interests of a fair, orderly and transparent market? 186 At the hearing the applicants contended that the definition of "error trade" in the Operating Rules meant that it had to be determined that a particular trade was not in the best interests of a fair, orderly and transparent market before the definition was activated. Whilst the question of what a fair, orderly and transparent market might be seen as a question of the proper construction of the Operating Rules, the injection of the expression "best interests" opened up the possibility that evidence of this kind might be useful. Accordingly, I admitted it. 187 Question 4 was as follows: Were the cancellations of the Cancelled Contracts in the best interests of a fair, orderly and transparent market? 188 I rejected Associate Professor Ashe's answers to this question on the basis that this was an issue for the court. Accordingly I rejected paragraphs 110-141. 189 Question 5 was as follows: Was the SFE Error Resolution Policy ("ERP") appropriate for determining whether a contract or trade was not in the best interests of a fair, orderly and transparent market? If so, was using the ERP for that purpose subject to any material limitations or qualifications? 190 There was no issue in the proceeding as to the appropriateness of the Error Resolution Policy. Accordingly, I rejected Associate Professor Ashe's evidence about this contained in paragraphs 142-152. 191 Question 6 was: Were the concepts of a Fair Price Value ("FPV") and a Market Integrity Range ("MIR") appropriate for determining whether a contract or trade was not in the best interests of a fair, orderly and transparent market? If so, was using an FPV and MIR for that purpose subject to any material limitations or qualifications? 192 There was no issue in the proceeding as to the appropriateness of the FPV and MIR. Accordingly, I rejected Associate Professor Ashe's evidence about this matter and in particular paragraph 153-156. 193 Question 7 was: Were the FPV and MIR concerning any of the Cancelled Contracts correctly determined using appropriate inputs, parameters and calculations, having regard to all the facts and circumstances in and about the Incident Period? 194 There is nothing in Associate Professor Ashe's field of study or his expertise which would indicate that he had any expertise relating to the calculation of a fair present value under the Error Resolution Policy or the calculation of a Market Integrity Range under the Operating Rules. Not being qualified I rejected his evidence in answer to question 7 and, therefore, paragraphs 167-188 of his report. 195 Question 8 was: Were the FPV and MIR concerning any of the Cancelled Contracts appropriately, correctly and consistently applied in determining whether or not to cancel the relevant Cancelled Contracts? 196 For the same reasons I rejected Associate Professor Ashe's evidence in answer to this question and paragraphs 189-222. 197 Question 9 was as follows: What was the amount of any loss suffered as a result of the Cancelled Contracts that were executed pursuant to, or in accordance with, orders placed with the SFE by each of the following traders ("the Traders"): [There then followed a list of the applicant traders] 198 The assessment of those damages required Associate Professor Ashe to value each of the futures contracts. In my opinion he was qualified to do so by reason of both his academic and professional experience. Accordingly, I admitted those parts of his report.

• I certify that the preceding one hundred and ninety-eight (198) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.