CFTC Demands Proprietary Trading Firm to Pay Record Sum for Taking Part in a Misleading Scheme and Spoofing

CFTC Demands Proprietary Trading Firm to Pay Record Sum for Taking Part in a Misleading Scheme and Spoofing

The U.S. Commodity Futures Trading Commission (“CFTC”) ordered the filing and finalizing of charges of $67.4 million versus Tower Research Capital LLC, a proprietary trading firm. The CFTC alleged that over a length of almost two years, Tower violated multiple sections of the Commodity Exchange Act by a deceptive and manipulative scheme of spoofing in equity index futures products. These were traded on the Chicago Mercantile Exchange (“CME”), and the Chicago Board of Trade (“CBOT”).  As a result, the CFTC ordered the largest total monetary relief ever in a spoofing case.

According to the CFTC, the scheme was executed by placing one or more ordered that they hoped to get filled (“Genuine Orders”) on one side of the market, while on the opposing side of the marking, putting one or more orders that the traders planned to cancel prior to execution (“Spoof Orders”).  These usually are composed of fully-visible passive orders, for a considerable amount. The traders would then cancel their Spoof Orders, after be given a full or partial fill on the Genuine Orders.  In order to keep their scheme from other market participants while placing Spoof Orders, the traders used an order splitter to enter a number of randomly sized, smaller orders. The scheme occupied participants to trade against their Genuine Orders, by doing so the orders would fill quicker, at cost effective rates than Genuine Orders typically would. The Spoof Orders were then added to develop an order book variance within the relevant markets, which would then send the idea that the market planned to purchase or sell the certain contracts within the Spoof Orders.  This process than displayed a supply and demand effect, and this scheme was financially benefiting Tower.  This in turn caused, an amount of $32,593,849 million in market losses.

Tower’s cooperation with the Division of Enforcement’s investigation was acknowledged, and will reduce civil monetary penalty as an outcome. Also, any payments of restitution, disgorgement, or monetary penalty that is made in agreement to the U.S Department of Justice’s affiliated criminal action will be provided for offsets by the order.

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