A newly filed lawsuit suggests the clearinghouse for 3 Red Trading was more heavily involved in perpetuating and covering up widespread spoofing at the proprietary trading firm than previously thought.
Advantage Futures is a futures clearing firm and it provides exclusive clearing services for the Chicago trading firm 3 Red Trading.
A clearinghouse steps in between the buyer and seller and guarantees the trade when a security is traded on an exchange.
3 Red Trading and its principle Igor Oystacher have been implicated in widespread spoofing by multiple regulators on multiple continents.
The Commodities Futures Trading Commission fined 3 Red and Oystacher $2.5 million for spoofing in December 2016; Advantage was filed $1.5 million for their lack of oversight of 3 Red’s trading activity in September 2016.
Edwin Johnson is a former principle at 3 Red Trading- once a 10% owner- who is the whistle-blower responsible for bringing the spoofing activity to light.
Now, in a new lawsuit filed in Cook County, Illinois, Johnson alleges that Advantage conspired with 3 Red to hide Oystacher’s spoofing activity and to illegally remove Johnson from the firm when he discovered Oystacher’s spoofing.
The lawsuit also names Joseph Guinan, the Chief Executive Officer of Advantage, and a former CME official, Carlos Rodriguez as defendants.
Advantage Futures declined to comment when reached at their office in Chicago; 3 Red Trading did not respond to an email for comment.
“Sometime in May or June 2013, Oystacher, Advantage, Guinan, and Rodriguez made an agreement amongst themselves whereby Oystacher would terminate Johnson, under the guise of allegations of impropriety, and Guinan and Rodriguez would utilize their positions at Advantage and CME, respectively, to ensure that Johnson would not be able to assert the rights and protections afforded to him under the 3Red Operating Agreement.” The lawsuit states.
It continues: “Under their agreement, Oystacher would be able to continue trading in the same manner as before, and profiting therefrom, Advantage would continue to earn massive clearing fees from 3Red, from which Guinan directly profited, and Rodriguez would eventually be given an executive position at Advantage.
Remarkably, Rodriguez, during the period of the allegations, was working as a CME executive who personally reviewed 3 Red’s trading application for the CME.
He has since been named the Chief Financial Officer (CFO) of Advantage Futures.
Chris Grams, a public affairs officer at the CME, declined to comment about whether the exchange has policies prohibiting their regulatory employees from later seeking employment with the companies they regulate.
The lawsuit alleges that in violation of law, Advantage removed Johnson from brokerage accounts without his authorization and thereby he was not given access to profits he was entitled to.
“At 1:09 PM, Strohmer sent an email to William Harrington (“Harrington”), of Advantage, wherein Strohmer advised Harrington that “Edwin Johnson is no longer an employee of 3Red Group or its affiliates and his signatory powers have been revoked … [and n]ew Operating Agreements are being drafted.”
“Strohmer’s email alone was insufficient to evidence Johnson’s dissociation, as Harrington responded at 2:12 PM, stating that 3Red needed to supply “a written document supporting the termination of Edwin as an employee and Managing Member.”
“Thereafter, on June 20, 2013, another Advantage employee, Karen Mueller (“Mueller”), noted in an email to 3Red employee Jen Lee that Advantage’s records still indicated that Johnson was an owner of 3Red, and that updated paperwork would be required to change said records.”
While written authorization was required from Johnson before he was to be removed from any accounts, the lawsuit alleges that Johnson was removed without his authorization: “Advantage ultimately did not follow through on its demand for written confirmation from Johnson, and instead accepted letters from Oystacher and legal counsel, which represented without supporting evidence or affirmation that Johnson has been dissociated from 3Red.”
An industry source previously told The Industry Spread that 3 Red Trading accounts for 20-50% of all trading at the CME and the lawsuit provides evidence these numbers are accurate: “Between December 2011 and January 2014, Oystacher was the world’s largest trader of four products, to wit, copper, natural gas, the CBOE Futures Exchange’s volatility index futures contract (‘VIX’), and E-Mini S&P 500 futures, and the world’s third largest trader in the spot-month contract for crude oil futures.”
According to the lawsuit, Advantage collected just five cents per contract but still made between $10,000-$30,000 daily for clearing the volumes trading activity at 3 Red Trading.
The lawsuit seeks damages on four counts and asks for no less than $30,000 per count.
Dennis Holden, a public affairs officer with the CFTC, did not respond to an email for comment.