JP Morgan reached parallel agreements with the US Department of Justice, Commodity Futures and Trading Commission (CFTC), and the Securities and Exchange Commission (SEC) resulting in the record penalty for the illegal trading activity.

An order from the CFTC stated that from 2008 through to 2016 numerous JP Morgan precious metals and treasuries traders, including heads of both desks, engaged in spoofing for hundreds of thousands of treasury notes, treasury bonds, and futures contracts.

JP Morgan significantly benefitted from the spoofing – which occurs when traders bid and offer with the intent to cancel before execution – and harmed other market participants as the scheme caused false signals and artificial prices in the market, the regulator said.

“Spoofing is illegal – pure and simple,” added CFTC chairman Heath Tarbert. “This record-setting enforcement action demonstrates the CFTC’s commitment to being tough on those who intentionally break our rules, no matter who they are. Attempts to manipulate our markets won’t be tolerated. The CFTC will take all steps necessary to investigate and prosecute illegal activities that could ultimately undermine the integrity of the American free enterprise system.”

JP Morgan also misled the CFTC’s division of enforcement’s spoofing task force in the early stages of its investigation, the watchdog stated, due to the bank’s response to requests for certain information. Although it noted JP Morgan’s cooperation in the later stages of its inquiry.

Elsewhere, US securities watchdog SEC stated that between April 2015 and January 2016, traders on the US treasuries trading desk engaged in similar manipulative trading strategies to create false buy and sell interests in the market. JP Morgan will pay disgorgement of $10 million and a penalty of $25 million related to settle the SEC’s action.

In response to the charges, JP Morgan said in a statement that it has entered into a three-year deferred prosecution agreement with the Department of Justice. The bank added it does not expect any disruption of service to clients due to the resolutions.

“The conduct of the individuals referenced in today’s resolutions is unacceptable and they are no longer with the firm,” said Daniel Pinto, co-president at JP Morgan and CEO of the corporate & investment bank, responding to the regulatory action. “We appreciate that the considerable resources we’ve dedicated to internal controls were recognised by the Department of Justice, including enhancements to compliance policies, surveillance systems, and training programs.”

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The Canadian financial institution, which had been operating as a registered swap dealer, will pay the total sum of $127.4 million to settle two separate enforcement actions.

The actions include a $77.4 million penalty for allegations of spoofing and making false statements, and $50 million for violating dealer requirements and supervision failures.

The US Commodities Futures Trading Commission (CFTC) said in a statement the case has resulted in the largest ever civil monetary penalty related to spoofing, which is a form of market manipulation whereby traders bid and offer with intent to cancel before execution to impact prices.

The latest sanctions from the CFTC follow its initial sanction in 2018 when the Bank of Nova Scotia was alleged to have engaged in spoofing gold and silver futures markets. In that order, the organisation was required to pay $800,000.

However, the CFTC added that Bank of Nova Scotia had provided numerous false statements about the order entry identifiers that its traders had used to trade futures contracts related to the 2018 investigation.

“These record-setting penalties reflect not only our commitment to being tough on those who break the rules, but also the tremendous strides the agency has made in data analytics. Our ability to go through the electronic order book and look across markets has enabled the CFTC to not only spot misconduct, but also to uncover false and misleading statements,” said CFTC chairman, Heath Tarbert.

“Over the last year, we have ushered in a new era of enforcement at the CFTC. Wrongdoers now have increasingly fewer ways to conceal their misconduct and face an even more unified front from civil and criminal authorities.”

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The US Commodity Futures Trading Commission (CFTC) confirmed that the German investment bank had resolved federal court charges stemming from alleged spoofing activity which took place in 2013, and an outage on its swap reporting platform that lasted for five days in 2016.  

According to the regulatory filing, two Tokyo-based Deutsche Bank traders engaged in numerous instances of spoofing– whereby traders bid and offer with the intent to cancel before execution – in treasury futures and Eurodollar futures contracts on CME from January 2013 until December the same year. Deutsche Bank will pay a $1,250,000 civil penalty to settle the charges.

In the case of the swap reporting violations, the CFTC found that Deutsche Bank’s swap reporting platform suffered an outage that began in April 2017. The issue meant that the bank could not report any swap data for multiple asset classes for five days, and efforts to fix the problem led to further reporting violations, according to the CFTC. Deutsche Bank has agreed to pay a $9 million penalty to settle charges related to the technical outage.  

“This case reaffirms the importance of proper reporting among registered swap dealers,” said CFTC director of enforcement James McDonald. “The Commission has been charged with monitoring and addressing systemic risks in our swaps markets. We can’t fulfil these obligations if we don’t have accurate reporting of the swaps dealing activity of our registrants.”

The CFTC added that in terms of the swap data reporting errors, Deutsche Bank has since appointed a monitor to ensure compliance with reporting obligations, while numerous other remediation efforts were implemented to solve the issue, including increased supervision and a disaster recovery plan.

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According to the charges from the US Commodity Futures Trading Commission (CFTC) and the US Department of Justice, for almost two years Tower Research placed thousands of orders to buy or sell equity index futures products traded on CME with intent to cancel prior to execution.

The spoofing scheme was intended to induce other market participants to trade against Tower Research’s genuine orders at better prices or in larger size. The CFTC said that the unlawful activity resulted in almost $33 million in market losses.  

“I’ve been clear that the CFTC will be tough on those who break the rules. This case reflects that commitment as well as the continued importance the agency is placing on parallel efforts with our law enforcement partners. A robust combination of criminal prosecution and regulatory enforcement is essential to preserving market integrity and protecting our market participants,” said CFTC chairman Heath Tarbert.

The US Department of Justice indicted two of the three former Tower Research traders that engaged in the spoofing scheme in October last year, and are due to be sentenced in February. The other is reportedly still at large.  

Tower Research has agreed to pay the penalty to settle the charges, and will now undertake remedial and cooperation obligations with the CFTC related to the case. Tower Research has since made investments in trade surveillance technology tools, increased compliance resources and revised its governance structure in light of the allegations.

“Traders at Tower Research Capital LLC fraudulently placed thousands of bogus orders they never intended to execute – to deceive other market participants and move the market for their own benefit,” assistant attorney general Brian Benczkowski of the Justice Department’s criminal division, commented. “This agreement includes monetary penalties, the return of unjust profits, and compensation of victims to protect our nation’s commodities markets from manipulation.”

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The global commodities trading arm of Merrill Lynch agreed to pay the fine to resolve the US Department of Justice’s investigation into the scheme which saw the firm’s metals traders deceive market participants by placing fraudulent orders for futures contracts.

Merrill Lynch Commodities admitted that from at least 2008 until 2014, its precious metals traders placed orders for futures with intentions to cancel before execution, in a bid to create a false impression of increased supply and demand and manipulate the market.

Thousands of spoofed orders were placed on the Commodity Exchange (COMEX) by Merrill Lynch traders during the six-year period, according to the US Department of Justice.  

The Commodities Futures Trading Commission (CFTC) announced a separate settlement with Merrill Lynch Commodities related to the same spoofing scheme, under which the firm will pay a penalty of $11.5 million. The regulator stated that the illegal activities and attempts to manipulate the precious metals futures market did in fact cause artificial prices.

“Today’s enforcement action shows that the Commission continues to aggressively pursue those who manipulate and spoof in our markets,” said James McDonald, the director of enforcement at the CFTC. “If left unchecked, this sort of misconduct can undermine the integrity of the price discovery process, harm law-abiding market participants, and diminish confidence in our markets more generally. That’s why we will continue to keep our markets free from spoofing and manipulation.”

As part of the investigation, the Department of Justice said that it also obtained an indictment against Edward Bases and John Pacilio, two former precious metals traders at Merrill Lynch Commodities, and charges related to their involvement in the spoofing scheme are pending.

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Japan’s Securities and Exchange Surveillance Commission (SESC) is pursuing the penalty from Citi after informing the Financial Services Agency (FSA) that the bank’s global markets business in the UK had allegedly manipulated certain derivatives contracts. The regulator stated that Citigroup should pay the amount of YEN133,370,000, or $1.2 million, following an in-depth investigation.

In a statement sent to The TRADE, Citigroup said: “Citi takes the recommendation seriously and apologises for any inconvenience or concern the conduct that gave rise to today’s recommendation may have caused. Citi will place the utmost priority on further enhancing governance and internal control to comply with the financial regulations and directives.”

According to the SESC’s investigation, an employee at Citigroup’s Global Markets business in the UK placed various buy and sell orders for 10-year Japanese Government Bond (JGB) futures without the intention of executing. This illegal tactic is known in the market as spoofing. 

“These transactions constituted a series of Market Transactions of Derivatives and offers that would mislead other investors into believing that Market Transactions of Derivatives were thriving and would cause fluctuations in the market of 10-year JGB Futures,” the SESC alleged in its statement on the investigation.

Major financial institutions globally, including Deutsche Bank, HSBC and UBS have been handed penalties for spoofing futures markets in the US. In 2017, Citi was fined $25 million by US authorities for spoofing orders in the US treasury and swaps market after exchange group CME inquired about suspicious trades.

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The US Commodity Futures Trading Commission (CFTC) said in a statement that the Japanese bank engaged in multiple acts of spoofing – whereby traders bid and offer with the intent to cancel before execution – on the CME and Cboe exchanges.

A trader accessed the futures markets through a trading platform from Mizuho’s Singapore office, placing large buy and sell orders for futures contracts and then cancelling them in order to test the market’s reaction to his spoof orders.

“Spoofing is an unlawful trade practice that undermines the integrity of the market, because it injects false information into the market—information on which market participants may rely,” said James McDonald, the CFTC’s director of enforcement.

“That’s true whether the bad actor is motivated by a desire to manipulate the market for profit, or, as was the case here, to test the market’s reaction to certain types of orders.  This case shows the Commission’s commitment to root out spoofing in all of its forms.  This case also shows that true cooperation—like that of Mizuho here—will be rewarded with a substantially reduced monetary penalty.”

According to the CFTC, Mizuho Bank has since launched an overhaul of its systems and controls for the detection and prevention of similar misconduct in the future.  As a result, the financial penalty of $250,000 was significantly reduced.

In August last year, Japanese institution the Bank of Tokyo-Mitsubishi UFJ also settled spoofing charges with the CFTC with a $600,000 fine, after it told authorities that one of its traders had carried out the misconduct in Treasury and Eurodollar futures markets.

Once the Bank of Tokyo became aware of the activities, the trader was suspended and then reported to the CFTC’s division of enforcement.

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Authorities in the US have taken enforcement action against Deutsche Bank, UBS and HSBC, imposing a combined $46.6 million penalty on the three institutions.

The Commodity Futures Trading Commission (CFTC) alongside the Department of Justice and the Federal Bureau of Investigation brought the charges to the three investment banks and six individuals.

Deutsche Bank will pay the largest penalty of $30 million for manipulating prices in precious metals futures contracts between 2008 and 2014.

According to the filing, the bank failed to supervise traders who placed large bids or offers on futures contracts with the intention of cancelling before execution, while also failing to implement a surveillance system to spot potential spoofing activities.

UBS incurred a $15 million penalty for the same alleged spoofing of precious metals futures contracts through price fixing and false bids. 

The CFTC found one trader at UBS placed orders and executed trades to manipulate the price of the contracts in order to trigger customer stop-loss orders and profit on proprietary trading.

UBS’ monetary penalty was significantly lower than Deutsche Bank’s as it self-reported the spoofing activity and cooperated with the investigation, according to the filing.  

HSBC was found to have carried out spoofing primarily on gold futures contracts between 2011 and 2014, and will pay a $1.6 million penalty.

Division of enforcement director, James McDonald, described spoofing as being a particularly “pernicious example of bad actors seeking to manipulate the market” using technology.

“The technological developments that enabled electronic and algorithmic trading have created new opportunities in our markets,” he said.

“As these cases show, we will work hard to identify and prosecute the individual traders who engage in spoofing, but we will also seek to find and hold accountable those who teach others how to spoof, who build the tools designed to spoof, or who otherwise aid and abet the wrongdoing.”

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The Bank of Tokyo-Mitsubishi UFJ has told authorities in the US that one of its traders had engaged in spoofing the treasury and Eurodollar futures markets, leading to a $600,000 fine.

The Commodity Futures Trading Commission (CFTC) was informed that between July 2009 and December 2014, the trader had placed multiple orders for futures contracts with intent to cancel before execution.

Once the Bank of Tokyo became aware of the activities, the trader was suspended and then reported to the CFTC’s division of enforcement.

It then launched an overhaul of its systems and controls to improve methods of detecting and preventing spoofing activity.

James McDonald, director of enforcement at the CFTC, explained his case shows the benefits of self-reporting and cooperation.

“When market participants discover wrongdoing, we want to incentivise them to voluntarily report it and to cooperate with our investigation, as the Bank of Tokyo did here.

“The Bank of Tokyo benefitted from its self-reporting and cooperation in the form of a substantially reduced penalty,” he said. 

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Two former traders at Citigroup in the US have been fined a combined $550,000 and a six-month ban from trading for spoofing treasury futures markets.

Stephen Gola and Jonathan Brims engaged in spoofing activity - bidding or offering with the intent to cancel before execution - more than 1,000 times in various CME US treasury futures products.

The US Commodity Futures Trading Commission (CFTC) fined Gola $350,000 and Brims $200,000 for the misconduct.

The bids were placed after another smaller bid or offer was placed on the opposite side of the same or correlated futures or cash market, the CFTC said.

Both traders placed their spoofing orders to “create or exacerbate an imbalance in the order book” and “cancelled their spoofing orders after either the smaller resting orders had been filled or the traders believed that the spoofing orders were at too great a risk of being executed,” the US authority added.

The fine to the former traders follows Citi’s $25 million penalty by the CFTC in January for failing to supervise its traders who were spoofing US treasury futures.

The regulator found Citi had failed to provide sufficient training about spoofing to traders on its US treasury and US swaps desks.

“In fact, for most of the traders through which Citigroup spoofed, the only communication they received about spoofing before or during the relevant period consisted of a single compliance alert containing the Act’s anti-spoofing language,” the CFTC said at the time.

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