Two residents of the UAE recently agreed to a consent order (“Consent Order”) with the CFTC in order to resolve civil spoofing charges. In the Consent Order, the defendants agreed to pay fines totaling $2.69 million, in addition to accepting trading and registration bans.
In its complaint, the CFTC alleged that from February 2015 to April 2015, the defendants allegedly engaged in spoofing in the gold and silver markets. Specifically, the defendants would regularly place large orders for gold and silver futures contracts on COMEX opposite resting small orders, and then cancel the large orders after the smaller orders were executed.
Notably, the complaint also reveals how quickly the exchange became aware of the alleged misconduct and how quickly it took action. In the complaint, the alleged spoofing occurred on February 18, 2015. A week later, on February 24, 2015, CME Group’s Market Regulation Dept. informed one of the defendant’s FCM (“FCM A”) that it was concerned spoofing had occurred. That same day, FCM A notified one of the defendants that Market Regulation had concerns that he may have been engaged in spoofing. On February 25, 2015, Market Regulation again identified similar conduct by the defendant and again notified FCM A. As a result, the FCM suspended the defendant’s electronic access. In approximately one month of trading, the defendant had made over $200,000 in his account with FCM A. Following the suspension of his electronic access, the defendant closed his account at FCM A and opened a new account at FCM B.
During March and April 2015, the defendants were allegedly coordinating their spoofing at FCM B. Essentially, one of the defendants would place small orders on one side while the other defendant would place large orders on the other side. Once the small order was filled, the large orders were cancelled. After reviewing defendants’ trades for the months of March and April, Market Regulation reached out again to FCM A (although it is unclear why as neither defendant had an account at the time at FCM A) and FCM B on April 29, 2015, regarding defendants’ disruptive trading practices. On April 30, 2015, CME Group issued notices summarily denying the defendants access to all CME Group markets.
At the exchange level, the defendants’ conduct resulted in fines of $80,000 and $90,000 and permanent bars on CME Group markets. However, these fines were a relatively small price to pay compared to the CFTC fines totaling $2.69 million.
There are a few lessons to take note from this matter. First, this case demonstrates that the CFTC and the CME Group will prosecute wrongful conduct on U.S. exchanges, even if the traders are located outside of the U.S. As a result, persons outside of the U.S. who trade on U.S. markets will be held to the same standard of conduct and presumed knowledge as U.S.-based traders. For any firm, this means maintaining a robust compliance manual that adequately educates its traders of applicable U.S. laws and exchange rules.
Second, as previously mentioned, this case highlights how quickly, today, Market Regulation can discover wrongful misconduct, and then take swift action. Overall, CME Group and other exchanges are more sensitive than ever to disruptive trading practices affecting their markets.
Finally, although defendants paid notable fines at the exchange level, these fines pale compared to those required by the CFTC. More frequently, resolving a matter at the exchange level is not necessarily the end of a matter, and further inquiries from the CFTC are becoming routine.