Legal scrutiny over FX spoofing claims intensifies

By:
Paul Golden
Published on:

The New York Attorney General’s decision to investigate the posting of false bids and offers in the FX options market for emerging-market currencies is further evidence of increasing regulatory interest in spoofing – if not yet clear evidence of a sustained crackdown on the practice.

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New York Attorney General Eric Schneiderman


It was widely reported recently that Eric Schneiderman’s office has issued subpoenas to four brokerage firms, less than a month after high-frequency trader Michael Coscia, owner of New Jersey-based Panther Energy Trading, was convicted of commodities fraud and spoofing.

In light of Commodity Futures Trading Commission (CFTC) rule 575, the Coscia conviction and now the interdealer broker investigations, firms and traders across all asset classes are going be responsible for the legitimacy of not just their cancellations but their orders, says Larry Tabb, founder & CEO of Tabb Group, a capital markets research and advisory firm.

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  Unless there are prosecutions, convictions, fines and or jail time, spoofing and manipulation rules will be ignored

Larry Tabb,
Tabb Group

Rule 575 prohibits the type of activity identified as spoofing, involving the submitting or cancelling multiple bids or offers to create a misleading appearance of market depth and submitting or cancelling bids or offers with intent to create artificial price movements upwards or downwards.

"If you can be fined or thrown in jail because an order you enter into the market can be deemed as spurious or a spoof, then you can be sure that traders and firms will need to better monitor quotes, orders and cancellations," says Tabb.

He reckons this will result in more computerized trading, adding: "With automated trading models, you can clearly document why you have submitted a bid or lifted an offer. It is documented and encoded. If the logic is to spoof, it will be there in black and white for regulators to find."

According to David Weiss, a senior analyst at Aite Group, the CFTC’s apparent determination to pursue apparent cases of spoofing could turn out to be the dawning of a new enforcement regime.

"Panther Trading had been in business a long time and Coscia is an experienced market participant," he says. "This is a milestone in anti-spoofing, unlike the case of Sarao, who is really just a flash patsy."

Navinder Singh Sarao is the UK trader who faces charges by the US Department of Justice and the CFTC relating to the May 2010 "flash crash".

Euromoney contacted a range of market participants for their views on whether traders and venues should assume responsibility for establishing the legitimacy of trade cancellations, including – coincidentally – two of the interdealer brokers to whom the office of the New York Attorney General has reportedly sent subpoenas for records. None was willing to comment.

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Bill Goodbody, Bats
Bill Goodbody, senior vice-president and head of FX at Bats Global Markets, says his company feels it is the role of the venue to monitor for behaviour patterns and marshal participants accordingly.


"At Hotspot [a Bats company], we have always prioritized creating a fair and orderly market place for all users and have developed propriety surveillance tools to counter any unwanted activity," he adds.

Goodbody says Bats is working to file a client suspension rule that will help the exchange take swifter action to prohibit manipulative behaviour on its US equities exchanges.

"There is no reason, in our mind, why Hotspot and the broader foreign-exchange market cannot follow this lead," he adds.

Aite’s Weiss says of the delay in creating rules to prohibit spoofing: "How long does Bats have to wait for the Securities and Exchange Commission to give it the power to take faster action against manipulative traders? This approval would probably be forthcoming much more quickly if the company was regulated by the CFTC."

Tabb observes that for interdealer brokers and the OTC markets, there really isn’t a self-regulatory organization that comes in and conducts audits.

"The problem that all regulators have had with regulating spoofing is that there weren’t guidelines and a focus on cracking down on this before rule 575 was put in place and really before Dodd-Frank," he says.

"Under Dodd-Frank, [the concept of] spoofing was more formalized, so you are seeing exchanges, rule-making organizations and now the New York Attorney General looking into this in more depth."

Coscia’s prosecution was the first under an anti-spoofing provision that was added to the Commodity Exchange Act by the 2010 Dodd-Frank financial reform.

When asked what – if any – mechanisms are particularly useful in detecting spurious bids, Tabb’s response is stark: "Prosecutions and convictions. While there may be laws on the books, unless there are prosecutions, convictions, fines and or jail time, spoofing and manipulation rules will be ignored."