Clampdown on Foreign Spoofers – Homegrown Ignored - The Industry Spread

Michael Volpe

After spending a decade in finance, Michael Volpe has been a freelance investigative journalist since 2009. His work has been published locally in the Chicago Reader, Chicago Crusader, Chicago Heights Patch, and New City. Nationally, Volpe's work has appeared in a wide variety of publications including the Washington Examiner, the Daily Caller, Crime Magazine, the Southern Christian Leadership Conference Newsletter, and Counter Punch. Volpe has been recognized by whistleblowers as leading the charge in getting their stories out. His first book Prosecutors Gone Wild was published in October 2012, his second book The Definitive Dossier of PTSD in Whistleblowers was published in February 2013 and his third book Bullied to Death was published in August 2015.

Clampdown on Foreign Spoofers – Homegrown Ignored

February 6, 2018

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.

Clampdown on Foreign Spoofing, Homegrown IgnoredCFTC’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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