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:
- a trader’s ability to influence price;
- the trader’s specific intent to influence the market or price;
- the existence of an artificial price;
- 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 2013||Panther (Coscia)||USA||5.80||CME Group futures; numerous contract types ICE EU futures||Aug 2011 - Oct 2011|
|Mar 2016||Khara / Salim||UAE||2.69||COMEX metals futures||Feb 2015 - Apr 2015|
|Nov 2016||Nav Sarao Futures||UK||38.61||Flash crash CME E-Mini S&P500 futures||Apr 2010 - Apr 2015|
|Jan 2017||Citi||USA||25.00||CME Group Treasury futures||Jul 2011 - Dec 2012|
|Jan 2018||Deutsche Bank||USA, UK, Singapore||30.00||COMEX metals futures||Feb 2008 - Sep 2014|
|Jan 2018||UBS||15.00||COMEX metals futures||Jan 2008 - Dec 2013|
|Jan 2018||HSBC||USA||1.60||COMEX metals futures||Jul 2011 - Aug 2014|
|Sep 2018||Victory Asset||USA||2.30||COMEX, NYMEX, LME crude oil & metals futures||May 2013 - Jul 2014|
|Sep 2018||Geneva Trading||USA||1.50||CME Group Agricultural & Metals futures||Jan 2013 - Oct 2016|
|Sep 2018||Mizuho Bank Ltd||Singapore||0.25||CME / CBOT STIR & Treasury futures||May 2016 - May 2017|
|Jul 2019||BAML||USA||24.96||COMEX metals||2008 - 2014|
|Aug 2019||Scotiabank||USA, UK, HK||127.00||COMEX metals futures; false statements||Jan 2008 - Jul 2016|
|Nov 2019||Tower Research||USA||67.40||CME & CBOT equity index futures products||Mar 2012 - Dec 2013|
|Dec 2019||Jefferies||USA||0.22||Poor client market access controls and supervisory procedures (FINRA)||Jan 2014 - Feb 2015|
|Dec 2019||Credit Suisse||USA||6.50||Poor client market access controls and supervisory procedures (FINRA)||2010 - 2017|
|Jan 2020||Mirae Asset Daewoo||South Korea||0.70||CME E-Mini S&P500 futures||Dec 2014 - Apr 2016|
|Jun 2020||Deutsche Bank||Japan||1.25||CME / CBOT STIR & Treasury futures||Jan 2013 - Dec 2013|
|Jan 2020||Propex Derivatives||Australia||1.00||CME E-Mini S&P500 futures||Jul 2012 - Mar 2017|
|Sep 2020||Citi||4.50||Deletion of tapes related to 2017 Spoofing case||2014 - Nov 2018|
|Sep 2020||FNY Partners||0.59||CBOT Soybeans; COMEX Gold; NYMEX Crude Oil||Jan 2013 - Jan 2016|
|Sep 2020||JPMC||USA||920.20||CME Group Metals futures||2008 - 2016|
|Sep 2020||ARB Trading||USA||0.75||ICE Agricultural futures||May 2017 - Jun 2020|
|Sep 2020||Sunoco||USA||0.45||NYMEX energy futures||Feb 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.