The Commodity Futures Trading Commission recently fined The Bank of Tokyo-Mitsubishi UFJ, Ltd (BTMU) $600,000 in a “spoofing” case that illustrates how internal bank risk controls are now rooting out bad apples. The market manipulation fine was a “substantially reduced penalty” due to the fact the bank identified and reported the ” Market Manipulation ” , the CFTC said in a statement.
Market Manipulation - Most of the spoofing behavior took place in the wake of the 2010 "flash crash"
The CFTC’s order settling charges against the bank alleges an unnamed derivatives trader at BTMU was engaging in market manipulative behavior from July 2009 to December 2014, with the bulk of the spoofing behavior occurring from 2010 to 2011.
The trader was utilizing a BTMU platform in Toyko when he “placed multiple orders for futures contracts with an intent to cancel the orders before their execution,” a common market manipulation tactic. “Trader A’s spoofing strategies included submitting orders on opposite sides of the same market at nearly the same time.” Such behavior is typically associated with lopsided order placement to submit buy orders on one side of the market and sell on the other side, a method to engage in “spoofing activity in order to move the market in a direction favorable to his orders.”
The CFTC order says the trader engaged 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.”
Markets typically have a balance, liquidity thresholds, that professional traders are known to identify before entering into significant positions. At the time the primary spoofing was alleged to have taken place, the May 6, 2010 “flash crash” had exposed the weakness of the “electronic eye” in market making software that was used in large part to determine bid and ask spreads.
Since that incident, the derivatives markets have significantly cracked down on market destabilizing behavior. In 2014, a high frequency trader convicted of spoofing was sent to jail, sending shock waves through an industry not accustomed to seeing people go to jail for white collar crime.
Market Manipulation - CFTC program to encourage brokerage responsibility for trading activity showing signs of success
In an effort to steadily clean up markets, the CFTC adopted a program whereby the brokerage firm providing trader access had a responsibility to monitor their client or internal proprietary trading team activity and report violations.
“This case shows the benefits of self-reporting and cooperation, which I anticipate being an important part of our enforcement program going forward,” James McDonald, the CFTC’s Director of Enforcement, said in a statement. “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.”
There are several layers of protection against high-frequency trading abuse, with the exchange operators playing a key role in monitoring the behavior of each trader through electronic means. Likewise, software systems are being offered to banks and brokerage firms that monitor trading activity and flag potential illegal market behavior.
The order indicates, however, that BTMU did not have such systems in place when the infraction took place, only recently engaging in this activity.
The CFTC found that “BTMU launched an overhaul of its systems and controls and implemented a variety of enhancements to detect and prevent similar misconduct,” noting the firm “revised its policies, updated its training, and implemented electronic systems to identify spoofing” in wake of the CFTC action.