SEC Charges Trader in Options Spoofing Scheme
The SEC charged a California-based options trader with orchestrating a spoofing scheme to manipulate the prices of thinly traded options.
According to a complaint filed in the Eastern District of California, the defendant placed non-bona fide "spoof" orders to create false impressions of market interest and manipulate the prices of certain options. The SEC alleged that the defendant targeted options with low trading volume and wide bid-ask spreads, placing visible orders at artificially favorable prices that he had no intention of executing. These spoof orders allegedly induced other market participants to trade at manipulated prices, enabling the defendant to execute profitable trades on the opposite side of the market.
The SEC said the scheme involved repeatedly narrowing the National Best Bid and Offer through visible spoof orders, followed by immediate-or-cancel orders placed on other exchanges to capture the manipulated price movement. The SEC alleged that once the trades were executed, the defendant canceled his spoof orders, allowing the market to return to true pricing levels. The SEC said that this pattern occurred on an almost daily basis for roughly 17 months, generating approximately $234,000 in illicit profits.
The SEC further alleged that the defendant knew spoofing was prohibited, having received annual compliance training on manipulative trading practices. Despite this, the SEC said, the defendant concealed his activity by providing false and misleading explanations to the firm’s senior management. The SEC said the firm ultimately terminated the defendant’s employment after its compliance team raised repeated concerns about his order placement and cancellation patterns.
The SEC charged the defendant with violating: SA Section 17(a) ("Use of interstate commerce for the purpose of fraud or deceit"); SEA Section 10(b) ("Regulation of the use of manipulative and deceptive devices"); SEA Section 9(a) ("Prohibition against manipulation of security prices"); and SEA Rule 10b-5 ("Employment of manipulative and deceptive devices").
The SEC is seeking (i) a permanent injunction, (ii) disgorgement of ill-gotten gains with prejudgment interest, (iii) civil penalties, and (iv) conduct-based restrictions on trading activity. According to the SEC, the requested relief would also bar the defendant from opening or trading in brokerage accounts without disclosing the final judgment to the relevant broker-dealer for a period of five years.