In a class action lawsuit filed in the Northern District of Illinois, HTG Capital Partners claims that the U.S. Treasury futures market is rigged by a user of the HFT tactic of “spoofing.”
Specifically, the CBOT in Chicago is the scene of the crime, of a “clear, discernable, and consistent pattern of manipulative and disruptive trading” in five, ten, and thirty-year Treasury futures.
The intriguing part: who is HTG Capital Partners? HTG boasts on its webpage of “latency-sensitive algorithms implemented on multiple co-located facilities.” In short, this is an HFT firm suing one or more other HFT firms and giving, by its allegations, detailed credence to everything that has been said in the last year by those who bemoan the rise of HFT firms.
But who is on the other side of the lawsuit? The Defendant(s) is John Doe, or are John Does.
Suing an Anonymous Somebody
What’s the point of suing Anon? In this case, much of the point is that a lawsuit creates an opportunity to elicit information from a third party who may be in the know as to who Anon really is(are). As the complaint states, “CME Group requires all CME Globex operators to identify themselves by the submission of a unique operator identification.” So CME Group or the pertinent unit, CBOT, ought to the able to identify the manipulators if the plaintiffs can only describe the manipulation with enough specificity. That, at least, is the plan.
So: what are the specifics?
According to the CME’s Rule 575, “No person shall enter or cause to be entered an order with the intent, at the time of order entry, to cancel the order before execution or to modify the order to avoid execution.”
The complaint is all about that charge or, in one word, about spoofing, either to create the appearance of market depth that doesn’t exist or to create artificial price movement in one direction or the other.
HTG alleges that since January 2013 somebody has been spoofing in the Treasuries futures market following a distinctive three-part pattern. In the first stage, the deceptive orders create a false momentum, causing “unwitting market participants to react by entering buy or sell orders in the same direction” as that apparent momentum. In the second stage, the defendant(s) cancel the orders. The third phase is, given the high speeds involved, “virtually simultaneous to the cancels,” the defendant(s) enter “one or more orders in the opposite direction” of the cancelled momentum, “trading against the remaining available contracts at that price….”
The result of course was that they could buy futures at prices lower than would have been available (or sell them at prices higher than would have been available) without the trickery.
Further, HTG alleges that this has happened a lot. They identify 6,960 instances of trading that, they say, fall into this “unmistakable pattern of repeated build-ups, cancels and flips” between January 2013 and August 2014. That averages out to 348 instances per month. So it seems that the abusive trading enabled by the contemporary technologies and algorithms constitutes not a hypothetical but (on this reading, which we might mention again comes very much from within the HFT fold) a regular feature of contemporary markets.
The Guessing Game
Next question … who is John Doe? Nobody needs to wait until this lawsuit moves forward to speculate, and nobody is waiting.
In particular Eric Scott Hunsader, of Nanex, and Mark Melin, of ValueWalk, have suggested that John Doe is Allston Trading. This seems plausible because HTG and Allston have a history. Last August HTG filed an arbitration case against Allston with CME, making allegations quite similar to those it has now made about John Doe.
According to this line of thought (which may be completely wrong, nota bene) the arbitration case failed precisely because HTG couldn’t establish that it lost money because of Allston’s manipulations. After all, HTG wouldn’t have bought from or sold to Allston. For each, the counter-party would have been the exchange itself. So HTG failed to make its case, and has now proceeded to try a different approach, using the district court to pressure CME to tell them who did what, so they can fill in the blank.
The lawsuit’s defendant won’t be known as John Doe forever. As Ms. Swift says, “I’ll write your name.”