Proprietary trading firm pays CFTC a record $67.4 million

It is a Commodity Futures Trading Commission (CFTC) personal best. The Commission has issued an order filing and settling charges against Tower Research Capital LLC, a proprietary trading firm, for executing what it calls “a manipulative and deceptive scheme,” spanning nearly two years and involving thousands of occasions of spoofing in equity index futures products traded on the Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT).

What is the largest CFTC spoof-related monetary relief order?

This one. The CFTC’s order imposes a total of $67.4 million against Tower, comprised of $32,593,849 in restitution, $10,500,000 in disgorgement, and a $24,400,000 civil monetary penalty and marks the largest total monetary relief ever ordered in a spoofing case. The CFTC’s order also requires Tower to cease and desist from violating the Commodity Exchange Act’s prohibition on spoofing and the use of manipulative and deceptive schemes.

What happened?

The order finds that from at least March 2012 through December 2013, Tower, by and through three former traders, placed orders to buy or sell futures contracts on thousands of occasions with the intent to cancel those orders prior to execution.

The traders implemented the scheme by placing one or more orders that they genuinely wanted to get filled on one side of the market. These typically were passive orders whose quantities are only partially visible to other market participants. At the same time, on the opposite side of the market, the traders placed one or more orders that they intended to cancel before execution (spoof orders). These spoofs primarily were fully-visible passive orders for a larger total quantity.

The traders canceled the spoof orders once they received a full or partial fill on the genuine orders. To hide the misdeeds from other market participants, the traders often used an order splitter to enter several smaller, randomly-sized spoof orders. In intentionally sending a false signal to the market that they wanted to buy or see the number of contracts in the spoof orders – creating a false impression of supply or demand – they hoped to induce other market participants to trade against the former Tower traders’ genuine orders. This, in turn would enable the genuine orders to fill sooner, at better prices, or in larger quantities than they otherwise would.               

Did Tower benefit from bad actions?

It did, in the short term. Because the three former Tower traders placed these legitimate and spoof orders through Tower accounts, Tower benefited. But these spoofs generated $32,593,849 million in market losses.

“This misconduct,” says CFTC Director of Enforcement James McDonald, “undermines the integrity of the price discovery process and can result, as it did here, in harm to law-abiding market participants.’

Could the $67.4 million hit have been worse?

Yes. The CFTC says its order recognizes Tower’s cooperation with the Division of Enforcement’s investigation and that cooperation resulted in a reduced civil monetary penalty. The order also provides for offsets for any payment of restitution, disgorgement, or monetary penalty that is made pursuant to the U.S. Department of Justice’s (DOJ) related criminal action. In fact, in a separate action, the DOJ’s Fraud Section entered into a Deferred Prosecution Agreement with Tower, deferring criminal prosecution of the firm on a commodities fraud charge.

Cooperation can help. But compliance is better.

Preparation trumps cooperation. Had someone been reviewing the activities of its former traders Tower would not be on the hook for millions of dollars. There is no question that compliance is cheaper. And that’s where Patrina comes in. For more than 25 years, Patrina has been helping compliance professionals as you stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s designated third-party services, our comprehensive 8-module compliance solution, and compliant data capture & file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s talk.