After a slow start, regulators and exchanges take more action against market abuse
Criminal charges unveiled against a former JPMorgan Chase metals trader this week signalled that authorities are catching up with spoofing, a form of abuse that accelerated along with hyperfast markets. John Edmonds pleaded guilty to commodities fraud and spoofing conspiracy in gold, silver, platinum and palladium futures, the US Department of Justice said. His case reflects a broadening campaign to stamp out the practice of fooling other traders by quickly placing and cancelling orders. Spoofing is a manifestation of electronic markets. Bad behaviour that might have gotten a trader punched in the nose on an exchange floor years ago can now be furtively executed by algorithm. But such activity also leaves digital footprints. After a slow start, market cops have learnt to follow them. Mr Edmonds was the 10th defendant hit with criminal spoofing charges in 2018, the justice department said, a big jump in number. Prosecutors filed criminal spoofing cases against just two defendants last year, and before that just one each in 2014 and 2015. The Commodity Futures Trading Commission, the main US derivatives regulator, in its most recent fiscal year brought 26 enforcement actions involving manipulative, deceptive or falsely reported trades, the majority spoofing cases. The sum was more than triple the average number of actions over the preceding four years. CME Group, the world’s largest futures exchange operator, has this year brought more than 50 disciplinary actions under rule number 575, which proscribes spoofing and related offences, a Financial Times analysis of exchange notices found. This compares with 42 in 2017 and nine in 2016.
Outside the US, Japanese financial regulators in 2017 fined a broker ¥218.37m ($1.9m) for spoofing the government bond futures market. The cases have nabbed perpetrators ranging from day-traders working from their homes to some of the biggest institutions on Wall Street. In January, Deutsche Bank agreed to pay $30m to settle CFTC charges of spoofing in precious metals markets — the agency’s largest spoofing fine on record. The Dodd-Frank financial reform of 2010 explicitly outlawed spoofing, defining it as “bidding or offering with the intent to cancel the bid or offer before execution”. The CFTC issued formal guidance on the matter in 2013. CME expressly banned spoofing the following year with rule 575, though it said offences were previously prosecuted under a different rule. The rising number of cases in part reflects watchdogs’ efforts to improve their surveillance technology. CME’s automated systems can now detect spoofing more quickly than before, the exchange operator said. In February CME began sending detailed order data to the CFTC on a daily basis. “We have worked with the Department of Justice on one hand, and exchanges on the other, to make sure we’re uncovering as much of this conduct as we can,” said James McDonald, CFTC enforcement director. The agency’s actions, “we hope, ultimately will have a long-term deterrent effect”. Mr McDonald said the existence of spoofing causes others to retreat from a market, damaging liquidity. “We’ve talked to market makers who have turned off their algorithms or have withdrawn from the market when they’ve seen disruptive trading patterns,” he said.
Concerns about price rigging have long persisted in precious metals markets, with small gold and silver investors expressing the most vociferous complaints. But the CFTC in 2013 closed a long investigation into silver futures misconduct, announcing “there is not a viable basis to bring an enforcement action”.
Standard market-manipulation cases require proof a trader caused an “artificial price”. That has historically been a high bar to clear. The spoofing statute is simpler, according to Aitan Goelman, who was CFTC enforcement director until last year. It only requires the agency to show an individual intended to cancel a bid before execution. “The anti-spoofing statue is really useful because as long as you can prove intent at that one moment in time, you don’t have to go any further” in terms of motive, said Mr Goelman, now a partner at Zuckerman Spaeder. “I think that’s why it’s been increasingly popular.” Or, as Paul Pantano, a partner at Willkie Farr & Gallagher, said: “Spoofing charges are a lot easier for the government to prove than a more sophisticated manipulation case.” A Chicago jury delivered the first criminal spoofing conviction in 2015. The defendant, Michael Coscia, lost his appeals and was sentenced to a three-year prison term for spoofing gold, soyabean oil and currency futures markets. He was previously found liable to civil charges of spoofing.
Prosecutors have now turned their sights on the vendors to defendants accused of spoofing. In January they unsealed criminal charges against Jitesh Thakkar, a Chicago technology consultant, for allegedly designing a computer program that helped UK day trader Navinder Singh Sarao to spoof the e-mini S&P 500 futures contract. “In this case, the government stretches the recently enacted ‘spoofing’ statute far further than it ever has before, charging the owner of a small software company with ‘aiding’ and ‘conspiring with’ a trader who used software created by the company years later to trade in the financial markets,” Mr Thakkar’s attorney, Renato Mariotti, wrote in a court filing. Mr Mariotti, in his previous job as a federal prosecutor, won the path-breaking conviction against Mr Coscia. Authorities may have more cases in the pipeline. The charging document against Mr Edmonds, whose lawyer did not respond to a request for comment, indicated he learnt his deceptive strategy from more senior traders at his bank, and that “he personally deployed this strategy hundreds of times with the knowledge and consent of his immediate supervisors”. JPMorgan declined to comment.
Market cops step up their fight against spoofing https://t.co/E9cHz29B6T via @financialtimes
— Philip Stafford (@staffordphilip) November 7, 2018