U.S. regulators brought 15 major (criminal or fines of more than $100,000) enforcement actions for spoofing or layering in 2017, the same number as in the previous four years combined. As detailed in our running table of trade surveillance related enforcement actions, the vast majority of enforcement activity centers on spoofing and layering, with wash trades a distant second and abusive messaging and marking the close next.
Of the 23 major enforcement actions for all trade surveillance related activity in 2017, 11 were brought by SROs, 9 by the CFTC, 2 by the DoJ, and 1 by the SEC. 18 involved futures trading and 5 involved securities.
Regulators levied just over $40 million in total fines in major enforcement actions in 2017, with a mean of $2.1 million and a median of $312,000. The largest levy of the year by far was the CFTC’s $25 million fine of Citi in January for spoofing in US Treasury futures. The allegations included veteran traders teaching a new trader how to spoof, which DealBreaker dubbed a “Spoofing Academy.” The three traders involved cooperated in the investigation and were rewarded with non-prosecution agreements, in accordance with a new CFTC policy announced the same day to more explicitly barter cooperation for reduced penalties.
A couple of emerging trends hidden in the data: (1) increased scrutiny by the CME of pre-open “pinging” orders that are small enough to not create order book imbalances required for traditional spoofing, but are large enough to impact indicative opening prices (these matters generally resulted in fines too small to be included in our table, but with growing frequency); and (2) “mini-manipulation” (aggressively trading an underlying product to improve the value of a held derivative position), which has long been a staple of energy market manipulation and “banging the close” in general, emerged unmoored to energy products or the daily close in the Lek Securities case, where traders stand accused of manipulating stocks in mid-session to improve the value of options positions they entered and exited the same day.
The lesson of this data is clear: Regulators have gotten their act together when it comes to enforcing trading misconduct, and there is very real chance that firms who do not spend adequate resources on trade surveillance now–particularly on detecting spoofing and layering–will end up spending way more on fines and litigation expenses later. To find out how Surveyor can help keep you off of next year’s list, email sales@TRLM.com.