CFTC Announces Second Spoofing Action Against Commodity Traders

The Commodity Futures Trading Commission (CFTC) recently announced its second enforcement action against a commodity trader for engaging in the manipulative scheme called “spoofing.”  U.S. Commodity Futures Trading Commission v. Eric Moncada, 12 CV-8791, United States District Court for the Southern District of New York, December 4, 2012 (“Moncada”).  In “spoofing,” a trader manipulates prices — the resulting prices do not reflect supply and demand fundamentals — by manipulating the actual bidding process to create a false impression of market liquidity.  In Moncada, the trader “spoofed” by repeatedly:

(i)  placing and immediately cancelling numerous large-lot orders without the intent to have the large-lot orders filled, but instead with the intent to create the misleading impression of increasing liquidity in the market;

(ii)  placing these large-lot orders at or near the best bid or offer price in a manner to avoid being filled by the market; and

(iii)  placing small-lot orders on the opposite side of the market from these large-lot orders with the intent of taking advantage of any price movements that might result from the misleading impression of increasing liquidity that the large-lot orders created.

In response, (1) the CFTC announced civil penalties (the higher of $140,000 or triple the monetary gains) and bans on future trading and registration and (2) the CFTC’s Director of Enforcement said:

The illegal scheme…entering and quickly cancelling large-lot futures orders without any intent to consummate a trade, undermines the integrity of the market. Traders may not employ deceptive schemes to simply drive price.  As our action today should make clear, we police the market for this type of activity and will bring charges against those who attempt to illegally game prices for their own advantage.  Release PR6441-12 December 4, 2012.

This is the second spoofing action that the CFTC has brought. In March 22, 2011, the CFTC fined Bunge Global Markets $550,000 for entering into trades they had no intention of executing for the purpose of determining the depth of and price in the market.  The Federal Energy Regulatory Commission has not yet acted on a spoofing case but would find “spoofing” a manipulative practice in trading wholesale natural gas and electric products.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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