Don Wilson is the head of one of the largest proprietary trading firms in the world and has worked closely to the US regulators for futures, options and swaps, as an expert advisor. That, however, doesn’t prevent him from being a suspect of rigging the markets. In 2013, DRW and Wilson found themselves charged by the CFTC for manipulating the interest-rate futures market by pushing settlement prices to their positions.
Wilson will be this week testifying in court in his own defense instead of choosing the pre-trial settlement procedure usual in these cases. The CFTC modus operandi of charging trading firms on market manipulation has delivered billions of dollars in penalties to the regulator. Don Wilson wants a showdown and is already drawing a sympathetic friend-of-the court brief from other finance executives: two exchanges that deal with DRW and three futures traders industry groups.
The Chicago-based firm DRW has 725 employees and trades on 40 exchanges around the world and is proud of its risk management, proved solid even during the Lehman Brothers collapse when CME held an emergency auction of DRW futures portfolios, with three of them being sold for a total of $300 million.
The case in court, ruled by US District Judge Richard Sullivan, relates to derivatives contracts Idex USD Three-Month Interest Rate Swap Futures.
According to court records, in the summer of 2010, DRW found that Idex futures were mispriced relative to a similar interest-rate swap market that traded off-exchange. The firm placed a $350m position expecting rates to rise. By September 2010, an employee sent an email saying that whoever took the other side would be “suckers”. However, the market did take the other side and in early 2011 DRW began placing bids electronically, then incorporated in settlement prices.
According to the CFTC, DRW’s bids were manipulative because they shoved prices in their favored direction: “Ultimately, defendants distorted the market price for their personal benefit over 1,000 times and profited by nearly $13m”, CFTC lawyers explained. DRW’s lawyers say that the bids were based on “legitimate economic rationales” and were not manipulated to the extent that settlement prices reflected the company’s bids.
DRW’s lawyers pressed the CFTC to dismiss the case and even complained to the US Congress. As DRW and Don Wilson refuse to reach a settlement deal, they will challenge the CFTC in Court and defend their stance on Thursday.