With CFTC and Other Regulators Aggressively Pursuing Spoofing Cases, Firms Need A Safety Net

On September 28, 2020, the U.S. Commodity Futures Trading Commission (CFTC) imposed its largest monetary penalty ever. JPMorgan Chase & Co (JPMC) and certain subsidiaries were fined a whopping $920 million for spoofing, and other manipulative practices carried out over an eight-year period.

The passage of the Dodd-Frank Act in 2010 amended the Commodities Exchange Act (CEA) and effectively outlawed the practice of ’spoofing’ in the United States. Spoofing is also illegal in the UK, the EU and most other jurisdictions.

According to the CFTC, spoofing is an illegal form of market manipulation in which a trader places an order to buy or sell a financial asset, such as a stock, bond or futures contract, which they intend to cancel before execution. This can include submitting or cancelling multiple bids or offers to create an appearance of false market depth, and submitting or cancelling bids or offers with the intent to create artificial price movements upwards or downwards. The pattern frequently seen in the cases has been the placement of a large order on one side of the market, then a smaller execution on the other side, followed by the rapid cancellation of the large order.

Spoofing Enforcement Pre and Post Dodd-Frank

Prior to the advent of Dodd-Frank, prevailing in a spoofing case was particularly burdensome. The Commodity Futures Trading Commission (CFTC) would be required to prove:

  1. a trader’s ability to influence price;
  2. the trader’s specific intent to influence the market or price;
  3. the existence of an artificial price;
  4. the causation of an artificial price.

These hurdles made enforcement incredibly difficult. In fact, between the CFTC’s founding in 1975 and the passage of Dodd-Frank in 2010, the agency is believed to have successfully litigated only one contested market manipulation case to final judgment.

The Dodd‑Frank amendment relaxed these spoofing enforcement requirements, asserting, "it shall be unlawful for any person to engage in any trading, practice, or conduct on or subject to the rules of a registered entity that is of the character of, or is commonly known to the trade as, ’spoofing’ (bidding or offering with the intent to cancel the bid or offer before execution)." Seemingly overnight, firms took notice as the regulatory hurdles were lowered. Now, substantiating spoofing was as easy as establishing a trader’s intent to cancel a bid or offer prior to execution. In the aftermath of Dodd-Frank, the previously strapped CFTC adopted a zealous enforcement agenda.

Wash, Rinse, Repeat: Spoofing on a Large Scale

A review of post Dodd-Frank enforcement actions indicates that the CFTC focused on a familiar, simple pattern, to identify instances of spoofing. Place a large order on one side of the orderbook (’spoof’). Place a smaller (’genuine’) order on the other side of the orderbook. Wait for the ’genuine’ order to trade and then quickly cancel the ’spoof’ order. This creates the appearance of movement in the market, enabling the trader to take advantage of the resulting confusion to trade and profit. Before long, you’re talking real money.

Wash, rinse, and repeat this pattern over eight years, and, as the JPMC case illustrates, you’re looking at profits subject to disgorgement of over $172 million, plus costs to the market of over $311 million.

Indeed, spoofing has become a bigger problem, and not just for the actions of a few individuals. Some rogue traders have even gone as far as to employ computer algorithms to perpetrate spoofing on a more industrial scale. In these cases, the CFTC has not only vigorously pursued the traders, and their firms, but also the programmers who wrote the algorithms in the first place.

Other traders have been able to leverage their firms’ market presence to enter single large orders without raising undue suspicion. In most cases, however, the underlying premise was the same, simple scheme described above. The CFTC noted that in some cases, instances of spoofing were picked up by firms’ surveillance systems, but were not acted upon.

While the CFTC has arguably been the most-active US regulator in bringing spoofing actions, the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) have also brought spoofing-related actions, respectively, based on specific FINRA rules, and breaches of the fraud and manipulation provisions in the Securities Act (which make it illegal to employ "any device, scheme, or artifice to defraud"). In addition, the U.S. Department of Justice has secured several criminal convictions for fraud in spoofing-centric cases, including several outside the U.S. Sanctions including fines and imprisonment were imposed.

The bottom line is: regulators, both within and outside the U.S., view spoofing as market manipulation, pure and simple, and with fewer hurdles to jump, they seem increasingly determined to hunt down spoofers and weed them out.

For example, below is a list of just some of the spoofing cases that have been initiated by the CFTC since Dodd-Frank. The cases show the CFTC’s extra-territorial reach, with firms in Australia, Singapore, South Korea, the United Kingdom and elsewhere falling afoul of U.S. regulations (in some cases, with traders being extradited to the US to face incarceration).

Date Name Trader Location Amount ($m) Exchange / Product Period       
Jul 2013Panther (Coscia)USA5.80CME Group futures; numerous contract types ICE EU futuresAug 2011 - Oct 2011
Mar 2016Khara / SalimUAE2.69COMEX metals futuresFeb 2015 - Apr 2015
Nov 2016Nav Sarao FuturesUK38.61Flash crash CME E-Mini S&P500 futuresApr 2010 - Apr 2015
Jan 2017CitiUSA25.00CME Group Treasury futuresJul 2011 - Dec 2012
Jan 2018Deutsche BankUSA, UK, Singapore30.00COMEX metals futuresFeb 2008 - Sep 2014
Jan 2018UBS 15.00COMEX metals futuresJan 2008 - Dec 2013
Jan 2018HSBCUSA1.60COMEX metals futuresJul 2011 - Aug 2014
Sep 2018Victory AssetUSA2.30COMEX, NYMEX, LME crude oil & metals futuresMay 2013 - Jul 2014
Sep 2018Geneva TradingUSA1.50CME Group Agricultural & Metals futuresJan 2013 - Oct 2016
Sep 2018Mizuho Bank LtdSingapore0.25CME / CBOT STIR & Treasury futuresMay 2016 - May 2017
Jul 2019BAMLUSA24.96COMEX metals2008 - 2014
Aug 2019ScotiabankUSA, UK, HK127.00COMEX metals futures; false statementsJan 2008 - Jul 2016
Nov 2019Tower ResearchUSA67.40CME & CBOT equity index futures productsMar 2012 - Dec 2013
Dec 2019JefferiesUSA0.22Poor client market access controls and supervisory procedures (FINRA)Jan 2014 - Feb 2015
Dec 2019Credit SuisseUSA6.50Poor client market access controls and supervisory procedures (FINRA)2010 - 2017
Jan 2020Mirae Asset DaewooSouth Korea0.70CME E-Mini S&P500 futuresDec 2014 - Apr 2016
Jun 2020Deutsche BankJapan1.25CME / CBOT STIR & Treasury futuresJan 2013 - Dec 2013
Jan 2020Propex DerivativesAustralia1.00CME E-Mini S&P500 futuresJul 2012 - Mar 2017
Sep 2020Citi4.50Deletion of tapes related to 2017 Spoofing case2014 - Nov 2018
Sep 2020FNY Partners0.59CBOT Soybeans; COMEX Gold; NYMEX Crude OilJan 2013 - Jan 2016
Sep 2020JPMCUSA920.20CME Group Metals futures2008 - 2016
Sep 2020ARB TradingUSA0.75ICE Agricultural futuresMay 2017 - Jun 2020
Sep 2020SunocoUSA0.45NYMEX energy futuresFeb 2014 - Jan 2015
Need a Spoofing Safety Net? NICE Actimize Can Help

The fact is -- market manipulation of this type is not difficult to detect. NICE Actimize has a range of out-of-the-box detection models to detect spoofing (and layering) across numerous exchange-traded and over-the-counter asset classes, plus the ability (through the SURVEIL-X Studio platform) for firms to design, test and implement their own models. Detection and investigation can be further enhanced through NICE Actimize’s industry-leading Communications Surveillance and Case Management functionality.