CFTC Continues Pursuit of Spoofing

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Close-Up View of System Hacking in a Monitor, representing cybersecurity

As the CFTC’s regulation of algorithmic trading draws near, the commodities regulator also seems to have stepped up its enforcement of the Dodd-Frank Act’s ban on spoofing, which is considered a form of market manipulation.

This week, the first trial in a criminal prosecution of a high frequency trader using computer algorithms to manipulate the financial markets through spoofing will happen. The CFTC also initiated charges this month against a Chicago trader and his high frequency trading firm for spoofing commodities on the Chicago Mercantile Exchange.

Earlier this year, the CFTC charged a London trader with spoofing E-mini S&P 500 futures in connection with the 2010 flash crash. After the enforcement action was announced, a law firm claimed that they were representing a whistleblower in the case and that this information was integral to the identification of this particular trader.

The CFTC whistleblower program offers rewards of between 10 and 30 percent when the information results in monetary sanctions exceeding one million dollars. There have been a number of reports of competitors complaining about traders spoofing in the marketplace and these complaints raise the possibility that they are also filing whistleblower tips to alert the CFTC to their suspicions of illegal behavior.

The traders engaged in spoofing typically place large orders to buy and sell on the marketplace which they do not intend to be filled. When other traders react to this potential order on the books, they then trade with them and cancel the large order designed to fool the other traders into moving the market. There has been intense debate in the financial community about whether the actions at issue are legitimate market activity or illegal manipulation.

There has also been significant questions as to whether the CFTC will be able to prove sufficient intent to violate the law. Many HFT orders are cancelled, so proving to a jury that the defendant intended to break the law, as is required for a criminal conviction, may be difficult.