Second Recent CFTC “Banging The Close” Case Results In Various CEA Violations, Fines, Trading Bans

On November 25, 2013, the Commodity Futures Trading Commission (CFTC) settled with Daniel Shak and SHK Management LLC (collectively Respondents) for violating the Commodity Exchange Act (CEA). Read about the case here. Specifically, the CFTC found that Shak and SHK attempted to manipulate the price of light sweet crude oil (WTI) futures contracts by “banging the close” on two days in 2008. Further in pursuing its “bang of the close” strategy, Respondents exceeded the NYMEX position limits for this contract, thereby also violating the CEA. Finally, the CFTC found Shak liable for SHK’s violations of the CEA.

This is the second recent CFTC ‘banging the close” case (read about previous case here). This time, Respondents established substantial short positions by selling Trading At Settlement (TAS) contacts, priced at the daily settlement price. Immediately prior to the close, Respondents offset some of their TAS positions by buying outright futures contracts at a rapid pace to start driving the price of the contracts higher.  Then, Respondents bought at a rapid pace during the close, in the end accounting for 52.56% of the prompt month open interest during the close on one day and 63.55% on the other day.

Further in “banging the close,” Respondents violated the CEA by exceeding positions limits on the Light Sweet Crude Oil Futures Contract.  The CEA “unambiguously imposes liability for violations of contract market position limit rules.  Order at 7.  In this case, Respondents exceeded the NYMEX-imposed 3,000 contract limit by approximately 500 the first day and 1,000 the second day.

Finally, the CFTC found Shak liable for the violations of SHK. Because Shak was the only principal of SHK, controlled the day-to-day operation of SHK and was responsible for (1) trading the pool account and (2) the employment of any SHK personnel or agents, the CFTC said that Shak possessed the requisite degree of control. Moreover, the CFTC said Shak either (1) knowingly induced, directly or indirectly, the acts constituting the violation or (2) failed to act in good faith.

To settle these violations, Shak and SMK agreed to, among other things, (1) a $400,000 fine, (2) a permanent ban on trading financial instruments in crude oil and (3) a two-year ban on trading any financial instrument during a closing period.

As in most market manipulative cases, there were “red flags” waving around, one of which in this case was that the Respondents’ trading was uneconomic and they made uneconomic trades in one market to benefit a position in another market. As the CFTC said, “[t]ypically, traders want to buy at low prices and sell at higher ones,” but here “Respondents bought at higher prices in order to ultimately benefit from pushing prices higher during the Close.  Since the settlement price of WTI futures contracts is based on the volume weighted average price of trades executed during the Close, Respondents would profit if the value of their substantial short TAS position in WTI futures contracts, which is based on the settlement price, was greater than the average value of their long position in WTI futures contracts.”  Order at 4.