CME Group Issues Disciplinary Action against Spoofing
Commentary by Bob Zwirb
The CME Group exchanges announced a disciplinary action against an individual member for spoofing. Spoofing is a violation of CME Rule 432 ("General Offenses").
CME Group found that the individual member entered large orders in the Ultra T-Bond, 30-Year Bond, 10-Year Note and 5-Year Note futures contract markets without the intent to trade on multiple occasions from May 2011 to October 2011. The Chicago Board of Trade Business Conduct Committee found that the individual entered large-lot buy orders on the CBE Globex electronic trading platform for the purpose of inducing other market participants to trade opposite the smaller resting orders he had entered previously.
The CME Group exchanges ordered the individual to pay a $55,000 fine and serve a 10-business-day suspension of access to any direct and indirect access to all electronic trading and clearing platforms owned or controlled by CME Group Inc.
Commentary
Dodd-Frank enhanced the CFTC's enforcement authority by making it unlawful to engage in certain specified "disruptive trading practices," including activities that (i) violate bids or offers, (ii) demonstrate intentional or reckless disregard for the orderly execution of transactions during the closing period of a market or (iii) constitute "spoofing," i.e., bidding or offering with the intent to cancel the bid or offer before execution. In the past, enforcement authorities focused primarily on the first two practices (especially with respect to trading firms in the energy sector). More recently, the focus has shifted to spoofing, which the popular press often conflates with the practice of manipulation.
Apparently, regulators are concerned about trading conduct that creates the illusion of market interest or that provokes other traders to react to false price signals. Accordingly, ridding the market of this practice appears to be a high priority. Whether or not the exchanges feel the same way (notice that the fine here appears to be modest and that the defendant admits no wrongdoing), they are under pressure to do something about it. See CFTC Tells CME Group to Work More on 'Spoofing' Detection, Reuters (Nov. 24, 2014); CFTC DMO Issues Rule Enforcement Reviews of the Chicago Board of Trade, Chicago Mercantile Exchange, Commodity Exchange, Inc. and New York Mercantile Exchange, Inc., CFTC Press Release PR-7066-14 (Nov. 24, 2014) (recommending that NYMEX and COMEX continue to develop strategies to detect spoofing).