Both the CME Group and its regulator, the CFTC, are reacting to recent demands that they beef up enforcement against spoofing. Perhaps over-reacting. Spoofing is becoming the new “it” violation, or at any rate the It enforcement action, in the same way that Edie Sedgwick was once the It Girl.
The cases that have resulted from this pressure haven’t been change-the-world cases; they haven’t been targeted for the most part at targets that did anything of the import of, say, a Navinder Singh Sarao. No, the most recent actions seem to be trying to create a track record that simply says, “yes, we do sometimes go after this sort of market manipulation – thanks for asking.”
Spoofing, the repeated placement and cancellation of bids or orders in order to manipulate a market, is part of the controversy over high-frequency and algorithmic trading methods [or trading abuses] that Michael Lewis kicked into high gear fifteen months ago with Flash Boys.
So … told to “jump,” the CFTC and CME have taken a couple of leaps in recent weeks. On Friday, June 5 the CME announced that it had barred one grain trader (Aleksey Vsemirnov) from its markets for a period of three years and another (Stephen Duggan) for two years.
Neither Admit nor….
Vsemirnov neither admitted nor denied the charges, but he did enter into a settlement ordering restitution and barring further access.
Likewise, Duggan has neither admitted nor denied, but he too entered into the settlement order. In Duggan’s case, no restitution was ordered.
The absence of a restitution order in the Duggan case, and the relatively modest figure required of Vsemirnov, in the other, were both justified according to the CME’s documentation by consideration of the “financial condition” of each trader. From such allusions, one has to infer that neither trader has been diving into a vault of gold coins in Scrooge McDuck style.
Separately, last month the CME acted ahead of the CFTC in the matters of Heet Khara and Nasim Salim, both of the UAE. The CME received some credit (“thanks and acknowledgement” in the terms of the release) from its regulator, the CFTC, for that. This case involves stuff that glitters: Khara and Salim spoofed the markets for gold and silver futures. The CFTC brought its charges in early May over events of March and April of this year.
Coordination and Milliseconds
The charge is that between at least February 2015 and until April 28th, the defendants regularly placed both large and small aggregate orders for such futures in the Commodity Exchange (COMEX), part of the CME Group. The traders then cancelled the larger orders after the smaller ones were executed.
The complaint gave the following example of coordination between the two. On April 27, 2015, at 5:49 standard time, Salim placed a 3-lot bid in the June 2015 Gold futures contract ay the second book level. Three seconds later, Khara began entering 5 lot offers. Within seconds, he had entered 17 such offers, giving him a total sell side exposure of 85 contracts, in descending price from 11820 to 11818.
One millisecond after the fourteenth of those 17 offers all three of Salim’s contracts traded. Khara then cancelled all of his orders.
This, too, settled on that let’s not-decide-the-facts basis. Neither admitting nor denying anything, Salim and Khara consented to a preliminary injunction by the U.S. District Court for the Southern District of New York, May 14th.
It seems doubtful that any plausible number of such enforcement actions will change the markets significantly. The markets are in important respects broken, and the spoofers are reacting to a broken system of incentives. The key reforms must be structural.
And about the alleged mastermind behind the Flash Crash, there is no “neither admit nor deny” option for him. He does deny, and he’s just been denied … any realistic opportunity to post bail. And a Bloomberg story with three names on the byline strikes an almost admiring tone. About his frugality and ambition, etc.
The fact, though, is that spoofing is probably about as ubiquitous as texting-while-driving. And it is unlikely that any single spoofer caused the flash crash, which is why officialdom has changed its regnant theories of whodunnit repeatedly.
A broken trading infrastructure dunnit.