Foreign traders spoofing in U.S. markets are not beyond the long arm of the CFTC, as a string of recent cases has brought home.
In a settled matter, the CFTC ordered a Propex Derivatives Pty Ltd, an Australian proprietary trading firm, to pay $1 million in penalties for a former trader’s spoofing activities over the course of five years in the Chicago Mercantile Exchange E-mini S&P 500 futures market. The trader shared trading profits with Propex, benefiting the firm while causing $464,300 in market losses. In addition to the CFTC settlement, Propex entered into a deferred prosecution agreement (DPA) with the Department of Justice in connection with one count of spoofing, and agreed to engage in certain undertakings (In the Matter of Propex Derivatives Pty Ltd, January 21, 2020).
"This enforcement action demonstrates, once again, the continued parallel efforts between the CFTC and our law enforcement partners to preserve market integrity and protect market participants," said CFTC Director of Enforcement James McDonald. "This action also shows the CFTC’s commitment to holding wrongdoers accountable wherever they may be located, including halfway around the globe."
Spoofing. A proprietary trading firm headquartered in Australia, Propex has never been registered with the CFTC. A former Propex trader, Jiongsheng (Jim) Zhao, called "Trader A" in the CFTC order, engaged in proprietary trading in commodity futures markets on behalf of Propex. From at least July 2012 through March 2017, Zhao placed thousands of spoof orders, namely placing bids and offers for E-mini S&P 500 futures contracts with the intent to cancel the bids and offers before execution.
Zhao used a typical spoofing strategy of placing one or more orders for a small number of contracts that he wanted to get filled on one side of the market ("Genuine Orders"), and also placing one or more orders for a significantly larger number of contracts on the opposite side of the market ("Spoof Orders"). Generally, Zhao canceled the Spoof Order(s) shortly after placing them, and often after his Genuine Order(s) were filled.
Penalties. The CFTC order found that through Zhao’s conduct, Propex violated Section 4c(a)(5)(C) of the Commodity Exchange Act. The CFTC required Propex to pay $464,300 in restitution, $73,429 in disgorgement, and a $462,271 civil monetary penalty.
According to the CFTC, Propex represented that it has engaged in remedial efforts since the conduct occurred, including retaining an independent consultant, updating policies in line with recommendations, implementing an automated trade surveillance system, and providing periodic compliance training for all traders and Propex's leadership.
The DOJ noted that Propex and Zhao admitted to the spoofing as part of the DPA. Some factors weighed against the defendants, including that Zhao continued spoofing for two years after his trading was flagged for senior management and that Zhao made false and misleading statements to the CME during its investigation. However, the DOJ determined that the penalties and DPA resolution were appropriate given the defendants’ cooperation and remediation.
Other international spoofing cases. The Propex settlement follows two recent CFTC resolutions involving spoofing by foreign respondents:
- In November 2019, the CFTC ordered Mitsubishi Corporation RtM Japan Ltd. to pay a $500,000 civil monetary penalty for engaging in spoofing activity in the platinum and palladium futures markets through an inexperienced trader on its proprietary trading desk.
- In January 2020, the CFTC settled charges against Mirae Asset Daewoo Co., Ltd. for spoofing in the Chicago Mercantile Exchange (CME) E-mini S&P 500 futures market. The $700,000 civil monetary penalty reflected the firm’s cooperation.
The CFTC has maintained a strong focus on spoofing as a key part of its enforcement efforts. With the current crackdown on foreign spoofers, no doubt word will continue to get out that spoofing in U.S. markets by any traders, foreign or domestic, will not be tolerated.
This is CFTC Docket No. 20-12.
MainStory: TopStory CommodityFutures Derivatives Enforcement FraudManipulation InternationalNews
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