CFTC Imposes Sanctions On A Proprietary Trading Firm For Spoofing The Market
10/24/2017On October 10, 2017, the Commodity Futures Trading Commission (“CFTC”) filed and settled charges against Arab Global Commodities DMCC (“AGC”), a proprietary trading firm headquartered in Dubai. Specifically, the CFTC found that one of AGC’s traders had engaged in a market manipulation practice known as spoofing in violation of Section 4c(a)(5)(C) of the Commodity Exchange Act (“CEA”), and that AGC had failed to “implement adequate policies and procedures to monitor” its employees’ trades for potential spoofing. In the Matter of Arab Global Commodities DMCC, CFTC No. 18-01, 2017 WL 4511098 (Oct., 10, 2017) (“Order”). AGC consented to the Order and agreed to pay a penalty of $300,000 plus post-judgment interest, without admitting or denying the Order’s findings.
The Order concluded that from at least March to August 2016, one of AGC’s traders repeatedly placed a small volume order on the COMEX Copper futures market one or two levels away from the best bid, and shortly thereafter placed a large volume order on the opposite side of the trading book with the intent to cancel it once the smaller order had been filled. The trader reportedly placed these orders after business hours, from his home. The CFTC concluded that these orders violated the CEA, which prohibits “bidding or offering with the intent to cancel the bid or offer before execution.”
Although AGC’s Future Commission Merchant relayed its suspicions of spoofing to one of AGC’s branches, the branch never escalated the issue. The trader’s spoofing was not addressed by the firm until the exchange commenced an investigation into the trader’s activities. Prior to learning about the trader’s spoofing, AGC had no anti-spoofing policy in place, nor did it train its employees on relevant CEA and exchange prohibitions against spoofing. Once it learned about the spoofing, however, AGC fully cooperated with the CEA and proactively implemented policies and training related to spoofing, among other things. AGC’s cooperation was highlighted by the CFTC in the Order, and is likely one of the reasons for the relatively small penalty levied against AGC. See Order, at 3 (“In accepting AGC’s Offer, . . . the Commission notes that AGC resolved the matter with the Commission at an early stage of the investigation and proactively implemented remedial measures and processes to deter similar misconduct in the future . . .”)
Spoofing is broadly defined in the CEA and recent regulatory enforcement actions targeting spoofing highlight the regulators continued focus on this transgression. See, e.g., United States v. Coscia, No. 16-cr-3017 (7th Cir. Aug. 7, 2017); see also Shearman & Sterling LLP, Seventh Circuit Upholds First Spoofing Conviction Against High-Frequency Trader, Need-to-Know Litigation Weekly, Aug. 15, 2017, available at http://www.lit-wc.shearman.com/seventh-circuit-upholds-first-spoofing-conviction. Given the Order’s focus on spoofing and AGC’s failure to implement appropriate policies and procedures, firms should examine their internal controls and consider whether they adequately address this subject of heightened regulatory scrutiny.