Spoofing: A Surveillance and Enforcement Challenge for Regulators

Posted: May 14, 2015 in Economics


Last week the CFTC moved swiftly to bring an enforcement action against two traders from the United Arab Emirates (UAE) for spoofing activity in the silver and gold futures market during the prior three month period.  Contrast this with the nearly five years it took for the CFTC to bring an action against Navinder Sarao for his spoofing in the E-mini S&P 500 futures market.   One might wonder whether this relatively rapid response signals a shift in the ability of the CFTC to detect and move quickly on spoofing cases.

Mr. Sarao’s actions on May 6th were clearly one of many, and perhaps a precipitating cause, of the “Flash Crash”.  Starting with an event like the crash and working backwards through the avalanche of data that the crash created is a daunting forensic task…perhaps too daunting for the regulators alone.  Indeed, it was the private sector that helped identify Waddell and Reed’s role in the crash and nearly five years later, the role of Mr. Sarao.  Is it unfair to have expected the regulators to have produced these findings given the public and Congressional scrutiny of the crash?  Moreover, is spoofing going to gain more regulatory attention across asset classes and what shape might such attention take?

Spoofing Detection

In the five years since the flash crash, the regulators have all heralded their leveraging of technology to improve data collection and analysis to facilitate better market surveillance…but how has this translated in an improved ability to detect spoofing?

With respect to both the UAE traders and Mr. Sarao, the detection evasion strategies employed were unsophisticated.  Mr. Sarao hardly tried to disguise his spoofing activities and used odd lot layered orders that effectively acted as his signature.  The UAE traders, in simplistic terms, employed the brilliant strategy of “your turn, my turn” to perpetrate their scheme; one layered while the other profited and vice versa.  Their activity was so blatant that Zero Hedge detected the manipulation in gold markets with “the tiniest effort” and posted it on May 6th, the day before the CME acted.  While prior cases might have been more sophisticated in scope, such as Panther Trading, the conduct was equally blatant.  In the Panther action (which, like Mr. Sarao’s case, is a criminal action) , 400,000 large orders were entered across 17 different CME group markets and three different ICE Futures markets, only to be cancelled 98% of the time.

Full Story @ [hesslegalcounsel]


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