The Commodity Futures Trading Commission filed civil charges in a federal court in Chicago last week against an individual and the trading firm for which he serves as founder, president and chief executive officer for trading activity which it claimed constituted spoofing and employment of a manipulative and deceptive device, scheme or artifice. According to the CFTC’s complaint, on 51 days from December 2011 through at least January 2014 the individual caused his company to post passive orders to buy or sell at price levels at or near the best bid or order, behind existing orders. This practice allegedly enticed other traders to join his bidding or offering activity, said the CFTC. Within a few milliseconds, the individual would then cause the company to place an aggressive order on the opposite side of the market, at the same or better prices, utilizing “avoid orders that cross functionality,” charged the Commission. The CFTC said this feature – meant to avoid unintentional wash trades – automatically cancelled the company’s previously placed passive orders. However, it left the orders pending of the other traders that had joined the direction of the passive orders, claimed the CFTC, and the company’s new aggressive orders would be executed against some or all of these other traders’ orders. The CFTC claimed this practice – which it said occurred 1,316 times during the relevant time period – violated relevant law because the defendants never intended the original passive orders to be executed. “Their scheme,” said the CFTC, “created the appearance of false market depth that Defendants exploited to benefit their own interests, while harming other market participants.” The CFTC indicated that the allegedly problematic trading activity occurred on CME Group exchanges and the CBOE Futures Exchange. (Click here for further details regarding this matter.)

Legal Weeds: The alleged posting and flipping activity cited by the CFTC in this action is different from the conduct that allegedly constituted spoofing in prior actions recently filed by the Commission. In those actions, the defendants allegedly layered large orders on one side of the market to benefit smaller resting orders on the same or opposite side of the market that were executed when the market price moved in an intended direction. After execution, the alleged layered orders were promptly cancelled. (Click here for a discussion of the CFTC’s and Department of Justice’s legal actions against Navinder Sarao for alleged spoofing activity in the article “London-Based Futures Trader Arrested, Sued by CFTC and Criminally Charged With Contributing to the May 2010 ‘Flash Crash’ Through Spoofing” in the April 22, 2015 edition of Between Bridges.) Here, the CFTC does not allege that the purported conduct was intended necessarily to move the market price, but was principally intended to attract more market depth. However, at least one analyst examining the CFTC’s lawsuit, said it seems as likely the questioned trading activity could be explained by a trader simply changing his market view after placing an order and not seeing prices move as expected, as by any other explanation. (Click here to access the article by Matt Levine entitled “Regulators Bring a Strange Spoofing Case,” in the October 22, 2015 edition ofBloombergView.) According to a statement issued by the chief compliance officer for the company, the CFTC’s charges are “completely without merit.” He said, “[t]he CFTC has oversimplified complex trading and is now trying to classify legitimate trading and risk management as a market infraction.”