Protecting A Position By “Banging The Close” And “Spoofing” Will Be Penalized – The CFTC

by Stinson Leonard Street - Dodd-Frank and the Jobs Act

On November 6, 2013, the Commodity Futures Trading Commission filed suit against Donald R. Wilson and his company, DRW Investments, for “banging the close” and “spoofing” the IDEX USD Three-Month Interest Rate Swap Futures Contract (the “Three-Month Contract”) from January 2011 through August 2011. See CFTC Banging the Close and Spoofing pdf.

DRW Investments took a $350 million bilateral position in the Three-Month Contract. In taking that position, they believed that the contract was undervalued—that its value would rise. It did not. At that point, according to the suit, Wilson and DRW “took matters into their own hands.”  CFTC Suit at 3

Understanding the alleged manipulative conduct, requires understanding that (1) the method for valuing the Three Month Contract was dependent on bids during a pre-set 15-Minute PM Settlement Period [between 2:45 p.m. and 3:00 p.m. ET] and (2) in the absence of activity during this Settlement Period, values would default to prevailing interest rates, so-called Corresponding Rates. According to the suit, “the methodology [for determining value] was dependent upon various data including bids and offers for the Three-Month Contract that were electronically placed by market participants on the NFX [NASDAQ OMX Futures Exchange] to the extent that any [bids or offers] were placed or pending during preset 15-minute, PM Settlement Period each day….If no bids or offers were electronically placed or pending during the time period, then, for many of the contracts it listed, IDCH [International Derivatives Clearinghouse] would generally default to setting its daily settlement rates, i.e., the IDEX curve [the daily settlement rates of the Three-Month Contract for various maturities] to be same as the prevailing interest rates in corresponding bilateral interest markets specified in the IDCH’s [International Derivatives Clearinghouse] (“Corresponding Rate(s)”).  CFTC Suit at 2-3.

According to the CFTC, to prevent prices from defaulting to the Corresponding Rates (and to increase their profits from values higher than the Corresponding Rates), Wilson and DRW “banged the close” and “spoofed” the 15-minute PM Settlement Period from January 2011 to August 2011.  They “banged the close” by repeatedly placing bids [nearly 60% of the bids and on 13 days all their bids] during the Settlement Period.

They “spoofed” by entering into those bids with no intent of consummating those transactions. According to the CFTC, DRW cancelled those bids after prices were set during the Settlement Period so that “DRW would [not] have to actually enter into a futures contract and pay the higher rates that it bid.” Id. “In fact,” according to the CFTC, “none of DRW’s electronic bids were accepted or “hit” to consummate an actual transaction.  Yet, all of its bids during the PM Settlement Period pushed the Three-Month Contract settlement prices higher than they would have been in the absence of DRW’s bids.” Id.

At least two red flags got the attention of the CFTC.

  1. An illiquid market.  According to one DRW trader, the Three Month Contract was the “ultimate of illiquid products.”  CFTC Suit at 20.
  2. Activity inconsistent with a prior period.  According to the CFTC, DRW did not have the capacity to place the bids on the NFX directly and so on January 21, 2011, they hired Sky Road LLC.  According to the CFTC suit, DRW “had no business purpose for retaining Sky Road other than to carry out the manipulative scheme.” CFTC Suit at 16.

In commenting on the suit, acting CFTC Enforcement Director Gretchen Lowe, said, “Traders cannot engage in manipulative acts to affect the price of futures contracts to achieve their desired profits, regardless of the so-called motive [apparently a reference to DRW protecting a position.]   Today’s action demonstrates that the Commission [the CFTC] will vigorously prosecute such cases to protect the integrity of the markets.”

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.

© Stinson Leonard Street - Dodd-Frank and the Jobs Act | Attorney Advertising

Written by:

Stinson Leonard Street - Dodd-Frank and the Jobs Act

Stinson Leonard Street - Dodd-Frank and the Jobs Act on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.