Federal regulators with the Commodity Futures Trading Commission (CFTC) are ramping up efforts to bust traders using a tactic known as “spoofing” to manipulate market prices, reports the Wall Street Journal, citing enforcement officials.
Earlier this year, the CFTC began receiving daily sets of market data from the world’s largest futures exchange – the CME Group, which handles around 85% of all futures trading by volume.
Thanks to the data sharing arrangement, regulators have had unprecedented access to daily trading data with a one-day delay, giving them the ability to analyze trading activity for fraud. The result has been a record number of manipulation cases brought against traders. Regulators at the CFTC had previously relied on CME staff and whistleblowers to spot the practice.
The data-sharing agreement, effective as of February, comes as the CFTC and Justice Department both pursue traders engaged in spoofing, a practice outlawed by the 2010 Dodd-Frank Act. When spoofing, traders place fake orders to create the illusion of supply or demand, causing prices to swing up or down. The traders then profit from the move back as the market reverts to normal levels.
The CFTC brought a record 26 cases related to manipulative conduct and spoofing in the fiscal year ended Sept. 30. Several of those civil cases were accompanied by criminal charges filed by the Justice Department. Between 2009 and 2016, the average number of such cases brought was just five a year. –WSJ
While spoofing is also a big problem in stock and bond markets, futures regulators and exchanges have been particularly concerned after the 2010 stock-market flash crash, which British trader Navinder Sarao caused after using an automated trading program to manipulate the market for S&P 500 futures contracts. Sarao was charged with fraud by US authorities.
The Journal notes that in one recent case, the DOJ charged three traders with manipulating stock-futures contracts, resulting in over $60 million in losses for the counterparty.
Regulators and exchanges typically use statistical analysis to determine if a trader’s strategy relies on spoofing. In addition, they examine emails and other communication for signs of intent to spoof.
CME also has implemented new automated surveillance programs to monitor trader-messaging activity. This can help determine whether traders intended to engage in manipulation. The exchange employs more than 50 investigators who have experience working on antispoofing programs. –WSJ
“Policing the market for disruptive trading practices continues to be a huge part of our regulatory investment and effort,” said CME’s chief regulatory officer, Thomas LaSala.
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