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Automaker Settles CFTC and NYMEX Charges for Disruptive Trading Practices in Precious Metals Futures

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Commentary by Bob Zwirb

Mitsubishi Corporation RTM Japan LTD ("Mitsubishi") settled CFTC and NYMEX charges (see here and here) for disruptive trading practices in precious metals futures.

To settle the charges, Mitsubishi agreed to (i) cease and desist from further violating CFTC rules, (ii) pay a civil monetary penalty of $500,000 and (iii) comply with the undertakings outlined in the Offer. The CFTC reduced the civil monetary penalty as a result of the automaker's cooperation during the investigation.

Separately, a panel of the NYMEX Business Conduct Committee (the "Panel") found that Mitsubishi did not provide proper training for a trader before allowing him to trade futures on NYMEX, resulting in his engaging in disruptive trades. The Panel ordered the automaker to pay a $250,000 fine to NYMEX.

Commentary

This matter illustrates two points. First, those who engage in spoofing increasingly are subject to enforcement actions from more than one regulator, and, therefore, vulnerable to more than one form of legal jeopardy. Here, the defendant is subject to two forms of jeopardy - that imposed by the CFTC and that by the exchange SRO. Had the DOJ joined in, as it has in a number of CFTC spoofing actions, the jeopardy would have been trebled.

Second, consider the implications of the following statement in the CFTC's Order: "At times, Trader A layered the Spoof Orders, and entered multiple Genuine Orders in conjunction with Spoof Orders. Trader A engaged in this spoofing activity in order to test how the market would react" (emphasis added). The questions are (i) why do traders sometimes attempt "to test" how the market will react to their orders and (ii) isn't such testing of the market's reaction, through what the CFTC describes as "spoofing," a legitimate goal in that the trader is attempting to assess liquidity? That is, the size of any trader's order will necessarily depend on how liquid or deep the trader believes the market is; it would be foolish to post a large bid or offer in an illiquid market.

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