Commodities Futures Trading Commission Archives

CFTC Explains Smart Contracts

November 29, 2018 by Michael Volpe Leave a Comment Filed Under: Feature Articles Tagged: CFTC, Commodities Futures Trading Commission, Daniel Gorfine, digital signatures, LabCFTC, payment transactions, smart contracts, virtual currency

The digital world is getting even more digital and the Commodities Futures Trading Commission (CFTC) is staying up.

The CFTC released a white paper entitled: “Primer Smart Contracts”.

“Smart contracts are being used to drive further automation in our markets and may have an impact across a range of economic activities,” said LabCFTC Director Daniel Gorfine. “This primer is focused on explaining smart contracts, exploring how they may impact our markets and highlighting potentially novel risks and challenges.”

What is a smart contract?

A smart contract is, “a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract.” According to its Wikipedia page.

A smart contract, the paper notes, “Allows self-executing computer code to take actions at specified times and/or based on reference to the occurrence or non-occurrence of an action or event (e.g., delivery of an asset, weather conditions, or change in a reference rate).”

These sorts of contracts are especially popular in virtual currency transactions.

The paper further notes, “Smart contracts use digital signatures – private cryptographic keys held by each party to verify participation and assent to agreed terms.” Continuing, “Smart contracts use oracles – a mutually agreed upon, network authenticated reference data provider (potentially a third-party); this is a source of information to determine actions and/or contractual outcomes, for example, commodity prices, weather data, interest rates, or an event occurrence.”

Smart contracts are executed, including payment transactions, electronically without the need for humans to act through the process.

“A smart contract is a set of promises, specified in digital form, including protocols within which the parties perform on the other promises.” Said computer scientist Nick Szabo in 1996. The basic idea of smart contracts is that many kinds of contractual clauses (such as liens, bonding, delineation of property rights, etc.) can be embedded in the hardware and software we deal with, in such a way as to make breach of contract expensive (if desired, sometimes prohibitively so) for the breacher.”

The potential benefits, the paper noted, include everything from faster speed to security.

CFTC

The CFTC and Smart Contracts

The paper noted that smart contracts can be used in everything from vending machines, crypto, and even credit default swaps, the latter two being regulated by the CFTC.

Smart contracts can “Streamline trading of products subject to oversight by the CFTC (e.g., options, futures, and swaps) and enhance efficiency from pre-trade through post-trade (e.g., price discovery, execution, clearing, and settlement).” The paper noted further.

While smart contracts have the potential of making transactions go faster, they also have the potential of making transactions less transparent and to “Unlawfully circumvent rules and protections.”

It is there where the CFTC plays a role.

For instance, the paper noted, “Smart contracts may be manipulated by insiders who may have ‘backdoors’ or ‘kill switches’ to the code or a deeper understanding of how the smart contract will react to particular events or inputs.”

“As with other areas of innovation, while there are many potential benefits, it is also critical to understand and mitigate risks and challenges; the primer accordingly works through a range of operational, technical, cybersecurity, fraud and manipulation, and governance risks and challenges.” The CFTC said in a statement.

The primer was released by LabCFTC, created in 2017 and CFTC’s fintech initiative.

CFTC Says Millennials Vulnerable to Scams

September 16, 2018 by Michael Volpe Leave a Comment Filed Under: Feature Articles Tagged: binary options, binary options dealers, binary options scams, CFTC, CFTC-registered, Commodities Futures Trading Commission, Division of Enforcement, Forex, James McDonald, market integrity, Millennials, scammers

James McDonald, CFTC’s Director of the Division of Enforcement

The Commodities Futures Trading Commission’s (CFTC) head of enforcement noted that scammers are using some of the most popular technology to target millennials.

James McDonald is the CFTC’s Director of the Division of Enforcement and he stated, ““We have seen an increase in the number of unregistered entities and individuals illegally pedaling apps, websites, and social media to retail customers for trading in forex and binary options. Many of these entities and individuals specifically target Millennials, who may be less experienced investors.”

McDonald made the statement as part of a press release announcing a dragnet, catching seven forex/binary options dealers who were offering forex and binary options trading for clients without registering with the CFTC.

Mr. McDonald further stated: “When customers deal with CFTC-registered entities, they can have confidence that certain required safeguards are in place to protect them from fraud and other abusive practices. Customers can have no such confidence when dealing with unregistered entities. That is one reason why the law requires individuals and entities offering products in our markets to register with the CFTC. And that’s why the CFTC will vigorously pursue entities and individuals who fail to register with the CFTC when required and put in place the necessary safeguards needed to protect customers and preserve market integrity.”

The following companies and individuals were sued by the CFTC:

Allen Investment Management, LLC et al., an Indiana LLC and founder and officer Ryan Jacob Allen;
Forex Entourage LLC, a Utah LLC and its cofounders Paul Anthony Romero and Zachary Duffy;
HedgeFund4U, LLC, a California LLC and its chief executive officer Isaac Ticon;
Hooley Solutions LLC, a Utah LLC and its founder and owner Steven Bradley Hooley;
International Markets Live, Inc.; a New York corporation;
LegionFX LLC, a Nevada LLC;
The Lion’s Share FX,a Michigan company and co-founders Jordan Denham, Collin Hargis and Josh Pascoe; and
Wealth Generators, LLC, a Utah LLC.

While the CFTC has not previously specifically warned millennials (those born in the early 1980s and 1990s), the announcement that unregistered forex and binary options firms are operating is nothing new; indeed, the CFTC has issued repeated alerts about forex and binary options scams.

Binary options can only be legally traded on regulated exchanges; NADEX and Cantor are two properly regulated exchanges which exclusively trade binary options, while the CME and others offer binary options among a basket of products.

The most recent alert on forex scams includes these red flags:

Promises that with Forex, there is no “bear” market
Firms that claim you can or should trade in the interbank market
Requests to send or transfer cash quickly via the Internet, by mail, or otherwise
Difficulty getting background information about the person and/or company

CFTC Has Full Commissioner Slate

September 1, 2018 by Michael Volpe Leave a Comment Filed Under: Feature Articles Tagged: Brian Quintenz, CFTC, Christopher Giancarlo, Commodities Futures Trading Commission, Dan Berkovitz, Dawn Stump, derivatives markets, Futures Industry Association, Stump Strategies, Walt Lukken

The full slate of commissioners is finally set at the Commodities Futures Trading Commission (CFTC).

The US Senate approved Dawn Stump and Dan Berkovitz as the fourth and fifth Commissioners on the CFTC.

The CFTC has five commissioners, including Chairman Christopher Giancarlo, but with resignations and a protracted nomination process the CFTC only had three commissioners since Sharon Boven stepped down in the summer 2017.

Rules also require that of the five commissioners, not more than three are from the president’s party.

Boven had been the only Democrat on the CFTC.

Stump is currently head of Stump Strategies previously executive director of the Americas Advisory Board for the Futures Industry Association and as a vice president at NYSE Euronet, before that she worked on Capitol Hill, as a staffer in both the Senate https://www.cftc.gov/PressRoom/PressReleases/7777-18 and House.

Berkovitz is a partner in the law firm WilmerHale, previously he was the CFTC General Counsel in the Obama administration.

Christopher Giancarlo, CFTC chairman

The confirmations were treated by fellow Commissioners and industry groups alike.

“On behalf of the entire agency, I am delighted to welcome Dawn Stump and Dan Berkovitz as Commissioners to the Commodity Futures Trading Commission. The agency’s work to carry out its mission to foster open, transparent, competitive and financially sound markets free from fraud and manipulation has never been more important.” Said Chair Giancarlo. “I strongly believe that a five member commission will inform the best and most lasting work possible. Dan and Dawn bring knowledge and experience to the Commission that will be respected and appreciated by all. I look forward to working with them to keep America’s derivatives markets strong and the envy of the world.”

“I am so pleased to have Dawn and Dan coming on board. Both commissioners bring with them a wealth of knowledge that will be invaluable to our oversight of the American derivatives markets.” Said Commissioner Brian Quintenz. “I look forward to collaborating with all of my fellow commissioners as we work to advance the Commission’s mission.”

The Futures Industry Association also sent congratulations, with its Chief Executive Officer Walt Lukken stating: “On behalf of the FIA Board of Directors, members and staff, I congratulate Dawn Stump and Dan Berkovitz on their U.S. Senate confirmation. Both bring years of experience and expertise to the agency at a critical time and will approach the issues facing this industry with fairness, balance and a willingness to listen. It has been a pleasure to work closely with both of these thoughtful individuals over the years and we look forward to the benefits of having a full complement of commissioners under the leadership of Chairman Giancarlo.”

Virtual Currency SRO Takes Another Step Forward

August 21, 2018 by Michael Volpe Leave a Comment Filed Under: Feature Articles Tagged: Bitflyer, Bitstamp, Bittrex, Brian Quintenz, CFTC, Commodities Futures Trading Commission, crypto market, Gemini, regulatory body, self-regulatory organization, trading industry, VCA, virtual commodity, Virtual Commodity Association, virtual currency, Virtual Currency SRO, Winklevoss

A self-regulatory organization to regulate virtual currency took another step forward.

The Virtual Commodity Association (VCA) announced it was forming a working group.

The VCA is the brainchild of the Winklevoss twins, who initially rose to fame as the foils to Mark Zuckerberg in the movie The Social Network.

They have increasingly invested in virtual currency more recently.

In March, they announced their idea for a virtual currency wide self-regulatory organization.

On Monday August 20, 2018, VCA announced the formation of a working group to “work toward the goal of establishing an industry sponsored, self-regulatory organization to oversee virtual commodity marketplaces.”

The VCA has brought industry heavyweights together: Bitflyer, Bitstamp, Bittrex, and Gemini are all part of the working group.

Brian Quintenz

The announcement was quickly met with approval from at least one commissioner on the Commodities Futures Trading Commission (CFTC), Brian Quintenz.

“Given the absence of federal oversight jurisdiction in the crypto market, in February and again in March of this year I called on the crypto platform community to come together and develop a self-regulatory organization-like entity that could develop and enforce rules.” Quintenz stated. “I am pleased that progress has been made on such a concept. Ultimately, an independent and empowered SRO-like entity could have a meaningful impact on the integrity and credibility of this young marketplace. Today’s announcement is a positive step towards that realization.”

A self-regulatory organization (SRO) is created privately and functions as a regulatory body over an industry.

Other examples of SROs including: the American Bar Association, the American Medical Association, and FINRA, in the trading industry.

FINRA provides licenses to broker/dealers; it’s not clear if the VCA will also have a licensure function.

According to the announcement the VCA will work to create sound practices in eight categories: virtual currency custody, customer communication, surveillance, transparency, rules-based markets, cyber-security, information sharing, and cooperation with other regulators.

“The VCA will be governed by a Board of Directors and capitalized by members. The Board structure (including a required number of independent directors) will be established soon. The primary function of the Board will be to facilitate the goals and mission of the VCA, potentially including the issuance of reports regarding the standards set forth by the VCA.” Their site noted.

FINRA Staff Talk About Innovation Initiative

August 17, 2018 by Michael Volpe Leave a Comment Filed Under: Feature Articles Tagged: AI, artificial intelligence, CFTC, Chris Van Es, Commodities Futures Trading Commission, ERI, Financial Industry Regulatory Authority, FINRA, fintech industry, Innovation Initiative, Kavita Jain, LabCFTC, RegTech, regulators, spoofing, Suptech

Kavita Jain, Director Emerging Regulatory Issues at FINRA

Artificial intelligence is helping the Financial Industry Regulatory Authority (FINRA) spot spoofing.

That promising statement was made by Kavita Jain, Director, Office of Emerging Regulatory Issues, who was on the FINRA Unscripted.

“Internally, we’re adapting the technology in various different areas. In the market surveillance program, for example, we are using artificial intelligence to assist in market manipulation or spoofing. We’re creating new patters based on AI to really augment our human analysts time.” Jain said.

The Commodities Futures Trading Commission (CFTC) started LabCFTC, a fintech initiative and in much the same way FINRA launched the Innovation Outreach Initiative in 2017.

Both Jain and the other guest on the podcast, Haime Workie who is the senior director at the Office of Emerging Regulatory Issues (ERI), have been leading that initiative.

They explained that the Innovation Outreach Initiative has five parts.

Fintech industry committee
Regional roundtables, thus far FINRA has held roundtables in Dallas, San Francisco and New York
Providing appropriate training for FINRA staff
Regulatory coordination, where FINRA speaks with global and domestic regulators about fintech issues
Producing white papers and other research

Chris Van Es, the host of the podcast, noted that sticking a tech to the end of a word immediately makes it trendy (much like .com also made ideas much more interesting in the late 1990s) and two new trendy terms with tech at the end are Regtech and Suptech. (supervisory technology)

“Suptech really refers to technology which is used by regulators themselves in the process of supervision. Potentially, it could be used to firms themselves (the trading firms) that use it as a supervisory type of function. ” Workie stated.

Van Es then asked, “How is FINRA leveraging technology with our own supervision and enforcement actions?”

Workie noted that the technology group and the market regulation group in FiNRA have taken the lead, and not Workie, but then said, “Some of the areas they have been working on have been around kind of cloud computing,” Workie said, “Cloud computing assisted us during this period of volatility.”

In their group, Workie said “within our own group in ERI, we’ve been looking at things like natural language processing to assist in our efforts for doing research. Trying To ferret out what issues we’re seeing more in the financial press as well as what areas we should be thinking about without having to read every article that’s in existence.”

Natural language processing “is an area of research and application that explores how computers can be used to understand and manipulate natural language text or speech to do useful things. NLP researchers aim to gather knowledge on how human beings understand and use language so that appropriate tools and techniques can be developed to make computer systems understand and manipulate natural languages to perform the desired tasks.” According to a white paper on the subject by Gobinda G. Chowdhury from the Deptartment of Computer and Information Sciences University of Strathclyde, Glasgow.

Workie noted that FINRA’s use of this technology as an analytic tool is still in its infancy.

Workie referred to an article written in December 2015 by fellow FINRA staffer Steve Randich which described how the cloud transformed FINRA’s approach to regulation. Here’s part of that article.

“August 24, 2015, was a ho-hum day.

“Sure, the Dow Jones Industrial Average tumbled nearly 600 points in the most active day of stock trading in about four years. But for us in the technology group at the Financial Industry Regulatory Authority it was largely a day just like any other.

“We seamlessly processed more than 75 billion records in stocks, bonds and options, that day — more records than Visa or MasterCard process over six months. To be sure, that was an unusual amount of data for us to process in one day, but in years past, that kind of spike would have meant we’d be up all night for days to process all that information. August 24, however was just another Monday, and it’s all thanks to our infrastructure on the cloud.

“In 2014, we made a groundbreaking decision to transfer our data to Amazon Web Services, the largest cloud company. This was groundbreaking not just because we are a financial regulator, but because we didn’t just move over our small projects, or our websites, like many companies have done. We moved over the crown jewels, our most critical processes: all of our market surveillance platforms.”

FIA Supports De Minimus Threshold

August 15, 2018 by Michael Volpe Leave a Comment Filed Under: Feature Articles Tagged: business risk, CFTC, Commodities Futures Trading Commission, de minimis, De Minimus Threshold, dealing activity, Dodd-Frank Act, FIA, Futures Industry Association, hedging, industry, managing risk, notional value, swap de minimus, swap dealer, Swaps market, trading data

Industry leaders wrote a letter in support of the Commodities Futures Trading Commission’s proposal to keep a swap threshold in place.

The Futures Industry Association (FIA) wrote a letter this week in support of CFTC’s proposal to keep the swap de minimus at $8 billion.

“FIA supports the Commission’s proposal to establish a permanent swap dealer de minimis threshold of $8 billion. FIA believes the data presented in the Proposal would support a higher de minimis threshold than $8 billion.” FIA said in a letter dated August 13. “However, we also recognize that, as stated in the Proposal, ‘maintaining an $8 billion threshold would foster the efficient application of the [Swap Dealer] Definition by providing continuity and addressing the uncertainty associated with the end of the phase-in period.’ We therefore support maintaining the de minimis threshold at $8 billion, and, supported by the data presented in the Proposal, we are opposed to lowering the threshold.”

The de minimus threshold is the minimum in notional value that a firm must maintain before having to register as a swap dealer with the CFTC.

“The CFTC de minimis exception rules provide that market participants who exceed $8 billion in gross notional swap dealing activity over a twelve-month period are required to register with the Commission.” The CFTC said on its site.

The de minimus threshold was scheduled to be reduced to $3 billion at the end of 2019, but in June, the CFTC announced it would maintain the threshold at $8 billion permanently.

The Dodd-Frank Act directed the CFTC to require registration of swap dealers and to establish a de minimis exception to registration.

In further explaining its support, the FIA also noted in the letter: “FIA believes that swaps market participants need certainty regarding the amount of swap dealing activity that will require registration as a swap dealer, and an end to the twice-extended phase-in period. FIA urges the Commission to finalize this aspect of the Proposal as quickly as possible, and well in advance of year’s end, in order to relieve market participants of the need to change compliance policies and procedures, operational systems, and in some instances business plans, based on a $3 billion de minimis threshold.

Christopher Giancarlo, CFTC chairman

When Giancarlo announced making the threshold permanent, he issued a statement which read in part: “Today, I believe the staff has had adequate time to analyze the most current and comprehensive trading data and arrive at a recommendation for the best path forward in terms of managing risk to the financial system. The staff has provided Commissioners with full access to the data they have used in their analysis. They have also conducted additional and specific data analyses requested by Commissioners.

“The data shows quite clearly that a drop in the de minimis definition from $8 billion to $3 billion would not have an appreciable impact on coverage of the marketplace. In fact, any impact would be less than one percent – an amount that is truly de minimis.

“On the other hand, the drop in the threshold would pose unnecessary burdens for non-financial companies that engage in relatively small levels of swap dealing to manage business risk for themselves and their customers. That would likely cause non-financial companies to curtail or terminate risk hedging activities with their customers, limiting risk-management options for end-users and ultimately consolidating marketplace risk in only a few large, Wall Street swap dealers.”

CFTC Does Flash Crash Analysis

August 13, 2018 by Michael Volpe Leave a Comment Filed Under: Feature Articles Tagged: Andrew Busch, British Pound Flash Crash, CFTC, Commodities Futures Trading Commission, commodity exchanges, flash crash, futures markets, HFT, high-frequency trading, John Coughlan, market fundamentals, price movements, US futures markets, volatility

Andrew Busch, Chief Market Intelligence Officer for the CFTC

So-called flash crashes are not increasing, and these sorts of events are rarely caused by humans in US futures markets.

That was the result of analysis led by Commodities Futures Trading Commission (CFTC) staffer, John Coughlan, and he joined the head of CFTC’s Market Intelligence Branch, Andrew Busch, on Busch’s latest podcast.

Prior to joining Busch, Coughlan delivered a white paper on the subject entitled: “Sharp Price Movements in Commodity Futures Markets.”

Coughlan said his research had three main conclusions:

1) neither the frequency nor the intensity of sharp price movements appears to be increasing over time

2) primarily linked to volatility, market fundamentals and news releases (NOT weakness or fragility in the US futures markets which would cause sharp price movements)

3) American Commodities markets are very efficient.

“They (US futures markets) incorporate new information really quickly and continue to be the premiere global discovery mechanism.” Coughlan further noted.

Coughlan said his research counters the conventional wisdom that high frequency trading has been a catalyst for many sharp price movements and that HFT has revealed market wide failures in American exchanges.

“Our research refutes that notion.” Coughlan said, at least for commodity exchanges.

The term “flash crash” first was coined after the May 6, 2010 event when the Dow Jones dropped 600 points in five minutes.

Other events which the research looked at included: the April 23, 2013, event when a fake Associated Press story was tweeted out claiming that the White House had been hit, October 15, 2014,when the Yield on the 10 Year US Treasury Bond fell from 2.2% to 1.86% and rebounded back within minutes, January 15, 2015, the Swiss National Bank (SNB) Event when the SNB removed an upper limit on the Swiss Franc causing the currency to increase 39% against the Dollar, and finally the British Pound Flash Crash which occurred on October 6, 2016.

Of the first conclusion- that sharp price movement events have not increased over the last five years- the research noted: “The first major finding is that there is no clear evidence of a widespread increase in the frequency of sharp price movements across sectors. The charts in Exhibit 3 below show the percentage of top 100 price movements that occurred in each year by sector and all sectors combined. For example, in the chart on the top left for the Ags and Softs sector, about 15% of the top 100 price movements occurred in the year 2012.

“If sharp price movements were increasing in frequency over time, meaning each year had more big moves than the year before it, one would expect the bars to get steadily larger from left to right, however that is not the case. Instead, the charts show significant variation in each year, but no consistent buildup or up-trend. Some contracts have seen more large moves in recent years, but there is not an across the board increase.”

Instead, the research found that sharp price movements are very sensitive to news events: “News and market data releases are heavily traded events in financial markets. Many participants plan strategies in advance and deploy them immediately following the release of information based on whether or not the news or data is in line with expectations. Therefore, the third major finding, as DMO staff expected, is that news and market data releases are large drivers of sharp price movements.”

One regular news event cited with the monthly Bureau of Labor Statistics- or jobs- report- which occurs on the first Friday of each month.

“The large mass of activity around 8:30 a.m. is the monthly jobs report published on the first Friday of each month by the Bureau of Labor Statistics. We see similar clusters of activity in corn and wheat related to crop reports from the USDA (released at noon) and crude oil and natural gas related to the EIA’s weekly storage reports (released at 10:30 a.m.).” The analysis stated, noting other regular events which can drive sharp price movements.

No Agreement Yet Between CFTC/Europe on Clearinghouse Equivalency

July 26, 2018 by Michael Volpe Leave a Comment Filed Under: Feature Articles Tagged: CFTC, CFTC/Europe, Chris Giancarlo, Clearinghouse Equivalency, Commodities Futures Trading Commission, European regulators, hedge funds, interest rate futures, London Clearinghouse

Clearinghouse equivalency continues to be a thorny issue between the Commodities Futures Trading Commission (CFTC) and European regulators.

That was the message from CFTC Chair Chris Giancarlo as he testified in front of the House Committee on Agriculture.

“Conversations are ongoing. Relationships are cordial. The conversations are honest, and the dialogue is direct and candid. Having said that, we’re not much further than we were the last time I reported to you on this matter. I’m sorry to say, that the European parliament while they’ve made small concessions in the current proposal that’s before the parliament; it’s still, in substance, would require the imposition of European substantive law on American clearinghouses.” Giancarlo stated. “That means that our clearinghouses in Chicago and New York would have to, in addition to following US laws set by American Congress, follow European substantive law set by European parliament. It almost seems ludicrous but that’s what is being proposed.”

This issue first gained traction when Giancarlo toured Europe last summer warning Europeans who were then threatening to force American clearinghouses to follow their regulations even on transactions cleared in the US.

Giancarlo was answering a question from House Committee on Agriculture Chairman Mike Conaway, a Republican from the State of Texas.

Conaway noted that then European Parliament Chair Patrick Pearson testified in front of Congress years ago and supported the idea of equivalency, which means a respect by one regulator and hands-off approach for regulators in other places.

Giancarlo further noted that both Brexit and a decision by the London Clearinghouse became more liberal with collateral than the European regulators would have liked have caused the Europeans to take an about face on this issue.

Patrick Pearson, European Parliament Chair

But Giancarlo noted that American regulators don’t do this, and European regulators have not pointed to any specific thing that American clearinghouses have done which would warrant such a drastic action.

The discussion continued when Congressman David Scott, a Democrat from the State of Georgia, took his turn asking questions.

Ginacarlo noted that the CFTC and European regulators had reached an agreement in the summer 2016 for equivalency, an agreement which was supposed to avoid exactly the situation now unfolding.

“But then Brexit happened. Brexit seems to have changed everything and the European Commission now, as you say (Scott), seems to be throwing out that agreement with a different approach.” Giancarlo noted, “Under the European approach now…If a clearinghouse is big enough- including in their futures book- then European law will apply to the entirety of their operations.”

Scott then asked how significant a priority this was for the CFTC to “correct this.”

“Europe would come to us.” Giancarlo said, “Our law has to apply to your clearinghouses. I would say ‘Look, under our Constitution that’s just not going to happen.”

Giancarlo then described a global financial nightmare: “Their next step would be to tell European firms not to use our services.”

Giancarlo said that would hurt European firms more than US clearinghouses because many products- like dollar interest rate futures- only trade on the CME and “European hedge funds need to use those products.”

“If they continue to press this issue, it’s their (European) firms that will be hurt the most.” Giancarlo concluded.

New Lawsuit Alleges Advantage Futures Conspiracy

June 22, 2018 by Michael Volpe Leave a Comment Filed Under: Feature Articles Tagged: 3 Red Trading, Advantage Futures, CFTC, clearing fees, clearing services, CME, Commodities Futures Trading Commission, futures clearing, Futures Conspiracy, Igor Oystacher, Proprietary Trading, regulators, spoofing, spoofing activity, whistle-blower

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.

Clampdown on Foreign Spoofers – Homegrown Ignored

February 6, 2018 by Michael Volpe Leave a Comment Filed Under: Feature Articles Tagged: Chicago, Commodities Futures Trading Commission, Deutsche Bank, HSBC, Jump Trading, spoofing, US Department of Justice, USB

Even as the US Department of Justice (USDOJ) and the Commodities Futures Trading Commission (CFTC) take victory laps portraying themselves as breaking up a global spoofing ring, they have all but ignored far more spoofing in their own backyard.

Last week to great fanfare the CFTC and USDOJ announced actions against three European banks – Deutsche Bank, USB, and HSBC – and eight traders. The banks and traders face millions in fines and some jail time potentially.

What is Spoofing?

Spoofing is when traders enter orders they do not intend to execute but use to drive the price of a security a certain way.

The long arm of US law showed tremendous reach as this sweep travelled half way across the globe, ensnaring an Australian trader named Jiongshen Zhao who is accused of spoofing S&P 500 E-Mini futures (ES) from 2012-2016.

The announcement included nine press releases by the CFTC and a one-thousand-word speech by the Acting Assistant Attorney General John P. Cronan.

CFTC’s Director of Enforcement, James McDaniel, even issued a separate statement which read in part:

The corporate cases involve a civil settlement with Deutsche Bank, which includes a fine of $30 million for spoofing and manipulation; a civil settlement with UBS, which includes a fine of $15 million for spoofing and attempted manipulation; and a civil settlement with HSBC, which includes a fine of $1.6 million for spoofing. The $30 million fine against Deutsche Bank marks the largest imposed by the CFTC to date for spoofing-related misconduct. Notably, the fines would have been substantially higher but for each banks’ substantial cooperation, and for UBS, its additional self-reporting of the conduct.

The CFTC today also announces the filing of civil complaints against six individuals and one company. These cases were filed in the Northern District of Illinois, Southern District of Texas, and District of Connecticut. These cases involve charges against three individuals who allegedly engaged in spoofing and manipulation as traders for major banks, and who allegedly taught their subordinates to spoof as well; two individuals who allegedly engaged in spoofing and manipulation as traders for proprietary trading firms; and one individual and company who allegedly built a computer program designed to spoof and manipulate the market. This alleged misconduct stretches across multiple futures markets—from precious metals, like gold and silver, to the Dow, NASDAQ, and S&P 500 E-mini futures, which are some of the most heavily traded contracts in the world.

These cases were investigated and filed in connection with the Division of Enforcement’s new Spoofing Task Force, which is a coordinated effort across the Division—with members from our offices in Chicago, Kansas City, New York, and Washington, DC—to root out spoofing from our markets. My thanks to all of the Task Force team members, and in particular to Neel Chopra who headed up the coordination effort. I am also grateful for the assistance of our law enforcement partners at the Department of Justice and the FBI, and for the assistance of the CME Group.

Only one of the traders charged was based in the US, Jitesh Thakkar of Naperville, Illinois, a suburb of Chicago. Thakkar used his Chicago based company, Edge Financial Technologies, Inc. to allegedly run a spoofing scheme.

Industry sources say that Chicago has far more spoofing than the allegations suggest, and that it goes on mostly with impunity.

As The Industry Spread has shown, 3 Red Trading is not only a major industry player – accounting for as much as half the trading at the CME in a given day – but a serial spoofer, sanctioned by six bodies on multiple continents.

While the firm was fined $2.5 million by the CFTC, and the CME separately fined and suspended its CEO, Igor Oystacher, his profits dwarf the fine and he continues trading unimpeded today.

3 Red Trading is not the only culprit in Chicago and may not even be the biggest. Industry sources named two other Chicago-based firms as significant spoofers that have also been largely ignored by the USDOJ and CFTC, and the CME, where they also trade significantly. Emails to all three organisations were left unreturned.

The sources would not provide documentation for two other firms, so The Industry Spread won’t name them, but this is not the first time Chicago has been linked to spoofing scandals. In July 2014, Crain’s Chicago Business ran a feature story about Jump Trading, another big player in the Chicago trading world.

Their firm, Jump Trading LLC, was all but invisible until it was among six companies subpoenaed in April by New York prosecutors. Jump has ascended the ranks of high-frequency traders during the past 15 years to become one of the top firms on the Chicago Mercantile Exchange, where $925 trillion of derivatives changed hands last year. Its annual revenue has exceeded half a billion dollars.

A subsequent follow-up to the story by the Financial Times noted Jump’s involvement in spoofing:

In the past three years, CME’s regulation wing has brought more than 40 exchange disciplinary actions for spoofing, misleading, or intentionally or recklessly disruptive conduct, it told the traders’ organization.

In one case CME cited as an example of spoofing, trader James Chiu was fined $155,000 after being found to have violated exchange rules in part by entering orders in stock index futures, ‘most of which he did not affirmatively want to be filled’, then cancelling them less than a second later, according to a disciplinary notice.

Regulatory records show Mr Chiu was employed by the large Chicago firm Jump Trading at the time of the alleged violation in 2010. He could not be reached. Jump, which was not named in the case, declined to comment.

Chiu has since started his own firm in San Francisco called Vatic Labs and they did not respond to an email for comment. An email to Jump Trading was also left unreturned.

“I imagine it’s due to the rise in electronic trading that happened when the Chicago floors went to screen [electronic] trading,” an industry source conjectured on the proliferation of spoofing in Chicago.

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