A Chicago-based trading firm is facing a $5 million fine from the Commodities Futures Trading Commission after being implicated in several schemes to manipulate CME rebates.
“The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing and simultaneous settlement of charges against Rosenthal Collins Capital Markets, LLC, now known as DV Trading LLC(RCCM), of Chicago, Illinois, for engaging in illegal wash sales in order to generate rebates of exchange fees based upon increased trading volumes.”
The CFTC fined the firm $5 million.
“Certain RCCM traders participated in the Program and discovered that they could earn rebates at their desired pace and quantities simply by self-trading. RCCM traders generated Program rebates by trading against themselves through three different strategies,” the CFTC order stated.
The CME provides rebates for Eurodollar packs and bundles based on certain quotas; the CFTC, in its order, alleged that RCCM engaged in schemes which were designed to buy and sell at equal prices solely to increase trading volume and maximise rebates.
RCCM assigned a trader whose sole responsibility was to create trades which maximised the rebate CME provided in Eurodollar packs.
“The trader discovered a way to inflate his volume in the Program and avoid RCCM’s wash blocking efforts by entering orders through two different servers. Using this technique, he was able to enter orders on opposite sides of the market in products subject to the Program, thereby trading against himself and generating double rebates,” the CFTC stated in its order.
Wash trading is when the same firm is on both sides of the same firm, and prohibited by CME; wash blocking means the steps that firms take to prevent this practice.
In another scheme, which occurred in 2014, two RCCM traders, working for two offices in two countries, engaged in what is known as scratch trading- or making multiple trades back and forth at the same price.
While such a scheme is difficult given that they weren’t working in the same office, the CFTC noted that the two traders, “would meet on Globex in one of the less-active markets subject to the Program and enter one lot orders back and forth at the same price over a period of several minutes. Although the trading did not result in any profit or loss to either trader (it only resulted in additional Exchange fees), the trading was advantageous because it generated rebates that could offset Eurodollar transaction fees.”
One RCCM trader discovered a scheme in which he could trade with himself.
“The trader was able to match orders without detection and still earn rebates on wash trades by taking advantage of the exchange’s implied matching engine. Specifically, the trader entered orders for Eurodollar pack butterflies on one side of the market and then entered orders on the opposite side of the market for similar, but not identical, Eurodollar pack spreads that contained the same underlying contracts.”