The Commodity Futures Trading Commission and the Chicago Board of Trade collectively sanctioned a floor broker US $250,000 for purportedly engaging in spoofing trading activities – after being fined for the same type of violation just a few years ago.

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CFTC and CBOT Collectively Fine Floor Broker US $250,000 for Alleged Repeat Spoofing Violations: Anuj Singhal settled an enforcement action with the Commodity Futures Trading Commission and a disciplinary action by the Chicago Board of Trade by consenting to pay an aggregate fine of US $250,000 related to purported spoofing trading.

According to the CBOT, on multiple occasions from June 2015 through December 2016, Mr. Singhal entered and cancelled layered orders for wheat and soybean futures contracts on one side of the market to effectuate the execution of small orders on the other side of the market. The CBOT claimed that Mr. Singhal never intended to execute his layered orders.

The CFTC – which based its enforcement action on a smaller period of time (March through June 2016) – alleged the same essential wrongful conduct by Mr. Singhal. However, the CFTC noted that, even after the defendant effectuated the execution of his small orders, “in most instances,” he continued to place and cancel larger orders on the other side of the market.

In 2014, Mr. Singhal settled another disciplinary action brought by the CBOT alleging that he engaged in a “pattern of [spoofing] activity” from June through August 2011 in various agricultural futures contracts. Mr. Singhal resolved this action by payment of a fine of US $60,000 and a three-month all CME Group exchanges’ trading prohibition. (Click herefor details in the article “Important Reminders Resonate From Recent CME Group and ICE Futures U.S. Disciplinary Actions” in the September 28, 2014 edition of Bridging the Week.)

To resolve his current CFTC enforcement action, Mr. Singhal agreed to pay a fine of US $150,000 and serve a four-month trading suspension. Mr. Singhal also agreed to pay a US $100,000 penalty and serve a concurrent four-month all CME Group exchanges’ trading prohibition to resolve the CBOT’s disciplinary action.

Mr. Singhal is a CFTC-registered floor broker.

Compliance Weeds: Earlier this year, the CFTC and the Department of Justice coordinated announcements regarding the filing of civil enforcement actions by the CFTC, naming five corporations and six individuals, and criminal actions by the DOJ against eight individuals – including six of the same persons named in the CFTC actions – for engaging in spoofing activities in connection with the trading of futures contracts on US markets. Two of the corporations that resolved their CFTC enforcement actions were Deutsche Bank AG and its wholly owned subsidiary Deutsche Bank Securities Inc.; they agreed to jointly and severally pay a fine of US $30 million. Although the purported problematic trading activity was undertaken by employees of DB, DBSI – a registered futures commission merchant – was named in this action because of its alleged failure to supervise. According to the CFTC, while DBSI maintained a surveillance system that detected many instances of potential spoofing by DB traders, it failed to follow up on “the majority” of potential flagged issues.

In 2016, the CFTC named Advantage Futures LLC, another FCM, in an enforcement action related to the firm’s handling of the trading account of one customer in response to three exchanges’ warnings, among other matters. The firm and two officers that were named as defendants agreed to pay a fine of US $1.5 million to resolve the CFTC action.

According to the CFTC, between June 2012 and April 2013, three exchanges alerted Advantage to concerns they had regarding the trading of one unspecified customer’s account which they considered might constitute disorderly trading, spoofing and manipulative behavior, in violation of the exchanges’ relevant rules. The CFTC claimed that Advantage initially failed “to adequately respond to the [exchanges'] inquiries and did not conduct a meaningful inquiry into the suspicious trading.” Only after the three exchanges threatened to hold Advantage responsible for its customer’s conduct, did Advantage cut off the trader’s access to three exchanges. However, Advantage failed to augment its oversight of the trader’s remaining trading or control his access to other exchanges “despite knowing that he employed the same strategy across all markets.”

Both the DBSI and Advantage cases suggest that the CFTC believes that FCMs have some type of oversight responsibility related to their customers’ trading to help ensure market integrity, and must take some appropriate action when they have knowledge of potential wrongdoing.

Accordingly, at a minimum, FCMs should have procedures to internally escalate potential allegations of wrongdoing by customers received from regulators and other third parties, and should consider proactive monitoring of some type on an ongoing basis for trading that may violate the law. The challenge of monitoring, however, is calibrating a system to identify meaningful potential exceptions so as not to be inundated by too many false positives and to ensure that data received and evaluated by the system does not unintentionally exclude any relevant order information. However, all alerts should be reviewed in some manner, and those reliably suggesting potential problematic conduct should be followed up. All monitoring should be documented.