Are regulators now cracking down on spoofing? It would appear so.

The United States Commodity Futures Trading Commission (CFTC) filed charges against Igor B. Ostacher and his firm, 3 Trading LCC for allegedly practicing a manipulative trading scheme called “spoofing.”

The regulator filed the lawsuit in the U.S. District Court for the Northern District of Illinois.

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Details of the CFTC allegations

Mr. Ostacher and his firm intentionally and repeatedly practiced spoofing while trading in at least five futures products on at least four exchanges—the E-Mini S&P 500 futures contracts on the Chicago Mercantile Exchange (CME); crude oil and natural gas futures contracts on the New York Mercantile Exchange (NYMEX); copper futures contracts on the Commodity Exchange Inc. (COMEX); and the volatility index (VIX) futures contract on CBOE Futures Exchange (CFE).

According to the CFTC, Mr. Ostacher, and 3 Trading practiced the deceptive and manipulative trading scheme for 51 trading days from December 2011 to January 2014.

Specifically, the complaint states:

Oystacher and 3 Red applied their pattern of manipulative and deceptive spoofing on at least fifty-one trading days between December 2011 and January 2014, while trading contracts in at least five futures products on at least four exchanges: (1) the Commodity Exchange Inc.’s (“COMEX”) March 2012 copper futures contract (“copper”) on December 1, 2, 5-9, 12-16, and 19­ 20, 2011; (2) the New York Mercantile Exchange’s (“NYMEX”) spot crude oil futures contract (“crude oil”) on May 7, 9-11, 2012; (3) the NYMEX’s spot month natural gas contract (“natural gas”) on November 30 and December 3-4, 2012; {4) the CBOE Futures Exchange’s (“CFE”) March 2013 volatility index futures contract (“VIX”) on February 19-22, 25-28, and March 1, 4-5, 2013, and the Apri12013 VIX contract on March 6, 7, 11, 12, 18-21, 2013; and (5) the Chicago Mercantile Exchange’s (“CME”) spot month E-Mini S&P 500 futures contract on June 11-12, 2013, December 16-19,2013, and January 6-10,2014 (collectively “the relevant markets” and “Appendix dates”). 1 Oystachet· and 3 Red were the largest traders in the respective contracts for copper, natural gas, VIX, and E-Mini S&P 500 futures, and the third largest trader in the spotmonth contract for crude oil futures (as measured by number of contracts traded) during these periods, despite the presence of thousands of other traders in these markets.

Mr. Ostacher and his firm’s manipulative spoofing created an appearance of false market depth and exploited it for their benefit while harming other market participants.

According to the regulator, the defendants manually placed large passive orders (spook orders) on one side of the market at or near best bid, which they intended to cancel before execution. Those orders were placed through accounts owned by 3 Trading to create a false impression of increasing market interest to trade in a certain direction.

Their objective was to attract other market participants to place orders on the same side of the market and at price levels similar to the spoof orders.

Mr. Ostacher and his firm will then cancel or attempt to cancel all of the spoof orders before being executed and simultaneously change their position from buy to sell or vice versa by placing at least one aggressive order on the other side of the market at the same or a better price to trade with market participants.

The defendants were able to buy or sell futures contracts in quantities at price levels that shouldn’t be able to them in the market without spoofing.

 

Spoofing threatens the stability of future market

Aitan Goelman, Director of Enforcement at CFTC said, “Spoofing seriously threatens the integrity and stability of futures markets because it discourages legitimate market participants from trading. The CFTC is committed to prosecuting this conduct and is actively cooperating with regulators around the world in this endeavor.”

The regulator is seeking civil monetary penalties, trading and registration bans, as well as well as permanent injunctions against Mr. Ostacher and his firm.

Below is a good explanation (via the complaint) of what spoofing is for those unfamiliar:

Oystacher and 3 Red engaged in this scheme by manually placing large (at least doubling the number of contracts offered or bid at those price levels, or better) passive order(s) on one side of the market at or near the best bid or offer price, which were intended to be canceled before execution. Defendants placed these order(s) (the “spoof orders”) through accounts owned by 3 Red to create the false impression ofmarket depth and book pressure in a certain direction (to either buy or sell) and induce other market participants into placing orders on the same side of the market and at similar pl’ice levels as the spoof orders. The Defendants would then cancel or attempt to cancel all ofthe spoof order(s) before they were executed and virtually simultaneously “flip” their position from buy to sell {ot· vice versa) by placing at least one aggressive order on the other side ofthe market at the same or better price to trade with market participants that had been induced to enter the market by the spoof orders they just cancele~. This strategy allowed Defendants to buy or sell futures contracts in quantities and/or at price levels that would not have otherwise been available to them in the market, absent the spoofing conduct.

The full complaint can be found here