The Commodities Futures Trading Commission (CFTC) has settled spoofing charges with a Japanese bank.
“The U.S. Commodity Futures Trading Commission today issued an Order filing and settling charges against The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU) for engaging in multiple acts of spoofing in a variety of futures contracts on the Chicago Mercantile Exchange and the Chicago Board of Trade, including futures contracts based on United States treasury notes and Eurodollars,” the CFTC stated. “The Order finds that BTMU engaged in this activity through one of its employees (Trader A), who accessed these markets through a trading platform from one of BTMU’s Tokyo offices. The Order requires BTMU to pay a $600,000 civil monetary penalty and to cease and desist from violating the Commodity Exchange Act’s prohibition against spoofing.”
Spoofing occurs when traders enter in orders which they do not intend to fill but rather to manipulate the price of a security.
According to the order, the spoofing took place from July 2009 through December 2014.
“During the Relevant Period, although largely in 2010 and 2011, Trader A placed multiple orders for futures contracts with an intent to cancel the orders before their execution (‘spoofing’). Trader A spoofed a variety of futures contracts traded on the CME and CBOT, including Treasuries and Eurodollars. Trader A’s spoofing strategies included submitting orders on opposite sides of the same market at nearly the same time,” the CFTC order stated. “In this pattern, Trader A first placed one or more relatively small bids or offers (‘Order 1 ‘). Soon thereafter, in the same market, Trader A entered one or more larger bids or offers (‘Order 2’) while Order 1 rested live in the market. Order 2 was placed on the opposite side of the market from Order 1. Hence, if Order 1 was a bid, Order 2 was an offer, and vice versa. In many instances, Trader A then received a partial or complete fill on Order 1, and then cancelled Order 2 before it was filled.”
Though the spoofing was performed by BTMU traders, it was the bank that uncovered the activity and self-reported the issue to the CFTC; the bank also initiated a full internal investigation and changed policies, according to the order.
The CFTC noted BTMU’s cooperation: “Once aware of Trader A’s misconduct, BTMU promptly suspended Trader A and reported the conduct to the Division. BTMU commenced an expansive internal review and assisted the Division’s investigation of the conduct. BTMU’s assistance expedited the Division’s investigation. At the same time, BTMU launched an overhaul of its systems and controls and implemented a variety of enhancements to detect and prevent similar misconduct. As part of this process, BTMU revised its policies, updated its training, and implemented electronic systems to identify spoofing. BTMU’s automated anti-spoofing measures include reviewing trading data and communications for suspicious activity.”
As a result of BTMU’s actions the punishment was far less severe.
“This case shows the benefits of self-reporting and cooperation, which I anticipate being an important part of our enforcement program going forward,” said James McDonald, the CFTC’s Director of Enforcement. “We expect market participants, through adequate supervision, to prevent this sort of misconduct before it starts. But when market participants discover wrongdoing, we want to incentivize them to voluntarily report it and to cooperate with our investigation, as the Bank of Tokyo did here. The Bank of Tokyo benefitted from its self-reporting and cooperation in the form of a substantially reduced penalty.”