CME Protects Identity of Accused Spoofer by Filing Motion to Quash
Commentary by Bob Zwirb
The CME Group filed a Motion to Quash in a case involving firm(s) that allegedly "spoofed" orders in the U.S. Treasury futures market. Filed in the United States District Court for the Northern District of Illinois, the Motion is intended to protect the identity of the firm(s) involved.
According to the Motion, CME Group is protecting "highly confidential" information from HTG Capital Partners LLC, a high-speed trading firm ("HTG"). In March 2015, HTG filed a lawsuit against the firm(s) alleging that HTG was taken advantage of on "thousands of occasions" by firms that spoofed the U.S. Treasury futures market.
Additionally, the CME Group maintained that any dispute between trading firms is supposed to be handled through confidential arbitration.
See: CME's Motion to Quash; HFT March 2015 Lawsuit.
Related news: Legitimacy of "Spoofing" Prosecution Questioned (with Zwirb Comment) (December 16, 2014); Commissioner O'Malia Issues Further Guidance on Disruptive Trading Practices (with Lofchie Comment) (May 22, 2013).
Commentary
A common observation regarding "spoofing" is that whatever harm it causes tends to be suffered by other high-frequency or algorithmic traders who may be engaging in their own forms of cat-and-mouse behavior in the market. Until now, the practice has been monitored by regulators and has resulted in a number of enforcement actions intended to uphold the integrity of the market.
Here, by contrast, the action is being brought by a private party: HTG, which trades in the "electronic futures markets" and complains that an unknown trader has manipulated the market to its own benefit "and to the detriment of HTG and other market participants" by engaging in spoofing "through the use of computer-based software and algorithms designed to deceive other market participants about the depth of order volume and to create artificial price movements upwards or downwards." The problem that HTG faces in bringing a private action is that it does not know who the defendant is because "trading on the CME Globex platform is anonymous," and because the SEC is not cooperating by revealing the identity of the alleged spoofer.
Conceptually, the problem associated with spoofing and other recently codified "disruptive" trade practices has always related to their scope and meaning. Despite several rounds of guidance and interpretations issued by the CFTC and the exchanges, what constitutes such illegal practices is still being sorted out. Perhaps this will be fleshed out better in private litigation, since private parties resort to litigation when rules are "inefficient." See Paul H. Rubin, Why Is the Common Law Efficient? The Journal of Legal Studies, Vol. 6, No. 1 (Jan. 1977), pp. 51-63. In any case, the Complaint (pp. 3-4) provides a clearer picture of the alleged wrongful conduct than previous complaints on the subject.