Recently, the CFTC filed and simultaneously settled charges for $550,0000 against Bunge Global Markets, Inc. (“Bunge”) regarding allegations that Bunge employees had engaged in “spoofing” in the soybeans futures market. While “spoofing” (bidding or offering with the intent to cancel such bid or offer before execution) will be explicitly illegal under provisions of the Dodd-Frank Act that become effective on July 16, 2011, the CFTC issued its order in the Bunge case based on its existing authority under the Commodity Exchange Act. The Bunge Order, and the CFTC’s recently proposed interpretive order regarding spoofing and other disruptive market practices under the Dodd-Frank Act, indicate that the CFTC will be actively enforcing the new prohibitions in the derivatives markets when they become effective.
The Bunge Case
In March 2009, two employees of Bunge entered electronic orders for Chicago Board of Trade soybean futures contracts on Globex, the CME Group Inc.’s (“CME”) electronic trading platform. They entered those orders during Globex’s pre-opening session, where the price at which the market will open for the day trading session is determined.
During the pre-opening session, two important things happen. First, traders enter into transactions but can also cancel transactions. Unless the transactions are cancelled prior to the open, the transactions are executable when the market opens. Second, periodically during the pre-opening session, using the transactions entered into and cancelled, a CME Globex computer algorithm calculates the Indicative Opening Price (“IOP”), i.e., the price at which a CME product is expected to open. The IOP is widely available to the market; it is broadcast to all CME Globex users and publishers of financial data.
During a thirteen minute period of the pre-opening session, the first Bunge employee entered 101 orders for 500 contracts each at prices above the prevailing bid. This trading caused the IOP to move “limit up.” But upon being contacted by CME’s Department of Market Regulation, the employee then cancelled all of the orders, causing the IOP to move lower. The employee later admitted that when he placed the orders, he had no intention of executing them at opening; the sole purpose of his activities was to determine the depth of support at specific price levels by causing the IOP to move up.
During a twenty-five minute period, the second Bunge employee entered into, and then cancelled, a series of 500 contract orders. The buy orders were above the prevailing bid, causing the IOP to increase, and the cancellations all caused the IOP to move to move lower. Like the first trader, the second did not intend to execute the orders but entered into them for the sole purpose of probing the market.
The CFTC alleged that these trading activities violated two sections of the Commodity Exchange Act (CEA). By knowingly placing orders that they did not intend to execute, the traders violated Section 4c(a)2(B) of the CEA by causing the IOP to reflect prices that were not true and bona fide, and these prices were reported to the market. The trading activities also violated Section 9(a)(2) of the CEA by knowingly delivering (i) market reports or market information through interstate commerce, (ii) that were false and misleading, and (iii) that affected or tended to affect the price of the a commodity in interstate commerce. In this case, the orders were false and misleading because the employees did not intend to execute the orders, and they affected the price because they were included in the IOP which was published to entities that used the data to make pricing decisions for a commodity in interstate commerce.
The Bunge case has relevance to traders in CFTC jurisdictional markets. In imposing the $550,000 penalty, the CFTC stressed that “conduct intentionally designed to disrupt fair and equitable trading, whether at the pre-opening, during the trading day or at the close will not be tolerated.”
Additional Relevance to FERC-Regulated Energy Markets
To the extent that the same factors as in Bunge could occur in trading FERC regulated electric and gas products, the case could also have relevance under FERC’s anti-manipulation rules. The relevant factors in Bunge were:
- Employees entering into transactions with the ability to cancel those transaction prior to execution;
- At the time of the transactions, the employees had no intent to execute those transactions;
- The sole purpose of entering into the transactions was to probe the market; and
- The transactions could move the price.
FERC has never publicly addressed a “spoofing” case, but if faced with these factors, FERC would likely investigate. In general, FERC’s anti-manipulation rules prevent the (i) making of any untrue statement of material fact or (ii) engaging in any act, practice or course of business that operates or would operate as a fraud or deceit. More specifically, in Amaranth Advisors, LLC, 120 FERC ¶ 61,085 at P 45 (2007) the Commission said “energy market participants may be deceived or defrauded where one market participant trades with the intent to artificially affect the price of a physical or financial energy product and has the ability to do so,” thereby preventing the price from being “set solely by the legitimate forces of supply and demand.”