CFTC SETTLES WASH SALES CASE INVOLVING BITCOIN

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

September 24, 2015

CFTC Settles with TeraExchange LLC, a Swap Execution Facility, for Failing to Enforce Prohibitions on Wash Trading and Prearranged Trading in Bitcoin Swap

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against TeraExchange LLC (Tera), a provisionally registered Swap Execution Facility (SEF), for failing to enforce its prohibition on wash trading and prearranged trading on the SEF platform.  The CFTC Order requires Tera to cease and desist from future violations relating to its obligations to enforce rules on trade practices.  Tera is based in Summit, New Jersey.

Specifically, the CFTC Order finds that Tera offered for trading on its SEF a non-deliverable forward contract based on the relative value of the U.S. Dollar and Bitcoin, a virtual currency (the Bitcoin Swap).  On October 8, 2014, the only two market participants authorized at that time to trade on Tera’s SEF entered into two transactions in the Bitcoin Swap.  The transactions were for the same notional amount, price, and tenor, and had the effect of completely offsetting each other.  At the time, these were the only transactions on Tera’s SEF.

Tera arranged for the two market participants to enter into the transactions.  Tera brought together the market participants, telling one that the trade would be “to test the pipes by doing a round-trip trade with the same price in, same price out, (i.e. no P/L [profit/loss] consequences) no custodian required,” according to the Order.

However, subsequent to the transactions, Tera issued a press release and made statements at a meeting of the CFTC’s Global Markets Advisory Committee (GMAC) announcing the transactions, creating the impression of actual trading interest in the Bitcoin swap.  Neither Tera’s press release nor the statements at the GMAC meeting indicated that the October 8 transactions were pre-arranged wash sales executed for the purpose of testing Tera’s systems.

As a provisionally registered SEF, Tera is required under the SEF Core Principles of the Commodity Exchange Act (CEA) and CFTC Regulations to enact and enforce rules prohibiting certain types of trade practices on the SEF, including wash trading and prearranged trading.  Tera’s rulebook, in fact, prohibited those practices.

The CFTC noted in the Order that “[t]hese facts should be distinguished from a situation where a SEF or other designated contract market runs pre-operational test trades to confirm that its systems are technically capable of executing transactions and, to the extent that these simulated transactions become publicly known, makes it clear to the public that the trades do not represent actual liquidity in the subject market.”

The CFTC appreciates the assistance of the Division of Market Oversight. CFTC Division of Enforcement staff members responsible for this case are Andrew Ridenour, Kim Bruno, Daniel Jordan, and Rick Glaser.

CFTC ORDERS CARGILL DE MEXICO TO PAY $500,000 FOR ROLE IN WASH SALES SCHEME

FROM:  COMMODITY FUTURES TRADING 

CFTC Orders Cargill de México SA De CV to Pay $500,000 for Unlawfully Executing Wash Sales on the CBOT and KCBT

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against commodities trading company Cargill de México SA De CV (Cargill de México) for executing wash trades involving corn, soybean, and wheat futures contracts on the Chicago Board of Trade (CBOT) and wheat futures contracts on the Kansas City Board of Trade (KCBT). The CFTC order requires that Cargill de México pay a $500,000 civil monetary penalty.

The Order finds that on multiple occasions between March 2010 and August 2014 Cargill de México engaged in wash sales and unlawful non-competitive transactions in certain agricultural futures products, including corn, soybeans, and wheat on the CBOT, as well as in hard red wheat traded on the KCBT. Before orders for these trades were entered on an exchange, Cargill de México employees, either acting alone or with another employee, entered equal and opposite transactions in the same futures contract for another account that was also owned by Cargill de México, and matched the product, quantity, price, and timing of those orders and trades. The Order finds that by so prearranging, structuring, and entering these orders, which negated the risk incidental to an open and competitive marketplace, Cargill de México also engaged in noncompetitive transactions.

In addition to imposing the $500,000 civil monetary penalty, the Order also requires Cargill de México to comply with certain undertakings. First, the Order requires Cargill de México to conduct training for certain personnel addressing the ethics, compliance, and legal requirements of the Commodity Exchange Act (CEA) and CFTC regulations with regard to prearranged, fictitious, or noncompetitive trading. Second, the Order requires Cargill de México to submit a report to the CFTC’s Division of Enforcement representing (i) that Cargill de México has adopted policies and procedures designed to prevent any potential prearranged, fictitious, or noncompetitive trading in violation of the CEA and CFTC regulations, (ii) that Cargill de México has conducted certain training sessions for relevant personnel, and (iii) that Cargill de México has begun using the self-match prevention technology available on the front end system provided by its primary clearing firm. Finally, the Order requires Cargill de México to cease and desist from further violations of Section 4c(a)(1) of the CEA and CFTC Regulation 1.38(a), as charged.

The CFTC thanks the CME Group, Inc. for its assistance in this matter.

CFTC Division of Enforcement staff members responsible for this case are Trevor Kokal, James G. Wheaton, Lenel Hickson Jr., and Manal M. Sultan.

CFTC COMMISSIONER CHILTON'S ADRESS TO THE TRADING SHOW CHICAGO 2013

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION,

"The Anatomy of Speed"

Keynote Address of Commissioner Bart Chilton to the Trading Show Chicago 2013, Chicago, Illinois
June 24, 2013
Jambo!

Jambo! Hello. I wanted to lay a little Swahili greeting on you this morning because we are going to talk a little about Tanzania and technology. Isn’t that what you were expecting, a little Tanzania and technology? Jambo … and you say … Jambo. That’s very good! A hearty hello to you. See how we are already learning and having some fun. Let’s keep it going. I have some new information and data to share with you later.



Magazines
Does anyone here still read magazines, ya know made of paper, that sorta stuff? I do. I still do. Remember when folks used to collect magazines? One collectable magazine was usually stored in your father’s closet.

The other one I’m thinking of was stored in a den or basement. It was a different size and had a yellow binder. I want you guys to all say it out loud. One thoughtful guess in: three, two one, go! You got it, National Geographic. Whoever said the phone book must have had a late night.

We still get Nat Geo at our house and I love it. Sure I enjoy Bloomberg Businessweek but that’s so much like work for me, it’s not very relaxing. I categorically enjoy Rolling Stone, especially Matt Taibbi’s great writing (although sometimes that’s a little like work for me), but the rest of Rolling Stone is just entertaining and enjoyable fun stuff. I can never get enough of Mick and Keith or the Boss. But Nat Geo is really neat in that it takes you to faraway places and has those wonderful photographs.

Last November I was reading a Nat Geo and there’s this story "Cheetahs on the Edge" written by Roff Smith with photos by Frans Lanting. It’s really very well done. It starts off in Tanzania. (How do you say hello in Swahili? Jambo!)

The story describes how the cheetahs live, how they can survive in the cold and heat, and how they are so very adept at knowing the territory and terrain to provide their prey the fewest opportunities to escape. I just couldn’t help but think of the similarities between actual cheetahs and market cheetahs. Quite frankly, I have not once felt that I gave HFTs an incorrect moniker. Reading this article confirms it all in my mind. It is very apt, indeed.

Market cheetahs are out there almost all of the time searching for their food—micro dollars—in milliseconds. They know the market terrain super well, just like cheetahs in the wild in Tanzania.

The Nat Geo story conveys how cheetahs have been, and are today, highly-prized. Well, I’m sure there are a lot of law firms that would like to have a few highly-prized cheetahs on retainer. I’m sure a lot of politicians would value a good campaign-related relationship with some of these cheetahs. Strike that; I know many already do have those relationships right here in this town.

The Nat Geo story also notes that cheetahs are actually a breed apart, a distinct genus, in fact—unlike the other big cats. Cheetahs have claws that are only semi-retractable and work like a sprinter’s shoes which allow them to go from zero to 60 mph in three seconds! And cheetahs aren’t just fast; they have a super short turning radius. They can change directions in a flash, or quicker than a flash. Well, duh on the market cheetahs. They may be like automated trading systems (ATSs) in some ways, like cheetahs in the wild are similar to lions, but they are both distinctly different from other cats in the wild and in markets. The speed of our market cheetahs make them definitively diverse from anything we have seen before. They are a breed apart.

Finally, a study late last year, which was conducted in conjunction with the CFTC, said in essence that cheetah trading imposes quantifiable costs on small investors. Aggressive cheetahs make a lot of money, and they make their biggest paydays when they trade with small, traditional traders. A cheetah trading with a fundamental trader makes $1.92 on a $50,000 trade but if that same trade is made with a small trader, the number goes up to $3.49. This could end up pushing smaller, non-cheetah traders out of markets.

All this is to say that the term cheetah for HFTs is more fitting today than ever. For the record, the word for cheetah in Swahili is "duma." Sounds like puma, but duma with a "d." Got it? Good, there may be a quiz.


The PROTECT Act—HR 2292
One thing I dislike is repeating things I’ve said, particularly when someone in the audience may have heard me discuss the matter before. One can’t avoid it all the time, but I try. In this regard, I’ll just say that I’ve been calling for a few key things to regulate the cheetahs over the years. I won’t go through them all because thankfully there has been some new and thoughtful leadership on these issues in Congress.

Representative Ed Markey has been one of my heroes since I began working in the House of Representatives back in 1985. I couldn’t be more impressed that he has taken it upon himself and his staff to work in this regard and I’m very supportive of his thoughtful legislation, HR 2292, the PROTECT Act. The legislation would require cheetah registration, testing, kill switches, and increased penalties for violations of the Commodity Exchange Act (CEA). The provisions of the PROTECT Act related to penalties aren’t just for cheetahs, but for all violations of the CEA. It would increase penalties from the current $140,000 fine per violation to $1,000,000 for individuals and $10,000,000 for entities. And the PROTECT Act gives discretion to the CFTC for how often a violation occurs. Currently, a violation has been considered to be only once per day. That makes no sense in today’s millisecond market environment. It is my hope that the PROTECT Act will become part of legislation to reauthorize the CFTC this year.


Cheetahs Today—New Data
Alright, with all that done, let’s get to some new stuff, shall we? Cheetahs are relatively new to markets. There isn’t one single word in any of the recent financial reform law—Dodd-Frank—about HFTs. Yet, they comprise a large percentage of the daily trading volume—roughly 30 to 50 percent. That’s an average. There are times—feeding times—when they have a much greater percentage of the volume. In fact, some new data I’m discussing for the first time today is fascinating.

Here it is: During the last year, we looked at 20 million trading seconds. Of those 20 million, we pinpointed 189,000 seconds, primarily around the open and close of markets. In those 189,000 seconds we found something astounding: Cheetahs traded at rates of 100-500 trades per second in a major commodity market! By any standards that exist, or have ever been discussed in public, that’s a shell-shocker data point. Trading 100 to 500 times per second, as a cluster, in one commodity contract? Holy mother of cheetahs! That's a mammoth market number any way you look at it. It’s actually pretty hard to even comprehend. This is my head exploding—pooofff!

If anyone says they know all about what’s going on with these cheetahs and markets, don’t believe them. How could they? Are they from another planet and have superhuman supercomputer powers? The best case is that some very smart folks know a portion of what is going on. But to suggest that they understand all of this isn’t correct. And, what is going on at this incomprehensible rate raises all sorts of policy, oversight and enforcement issues that our Commission needs to consider.


Fantasy Liquidity
One such issue has been sort of a dirty little secret. That’s the matter of fantasy liquidity created by what are called "wash" trades.

If one trades with yourself, that is putting a price out and hitting that price for yourself, you take no risk, yet create the market impression that a legitimate trade has occurred. It appears to the market as if there is liquidity. If this was only for a few trades, it wouldn’t make much of a difference to the market. It wouldn’t seem like much liquidity. However, if there is a lot of trading going on with only one trader "washing" the trades by themselves, that is not only wrong; it is illegal.

Section 4c of the Commodity Exchange Act states that it is: "unlawful for any person to offer to enter into, or confirm the execution of a transaction involving the purchase or sale of any commodity for future delivery … if the transaction … (i) is, of the character of, or is commonly known to the trade as, a ‘‘wash sale."

At the same time, there are exchange rules out there that say, "No person shall place or accept buy and sell orders in the same product and expiration month … where the person knows or reasonably should know that the … transaction(s) [is a] wash sale(s). Buy and sell orders for different accounts with common beneficial ownership that are entered with the intent to negate market risk or price competition shall also be deemed to violate the prohibition on wash trades." Another exchange rule says, "No Market Participant shall … make or report any wash trade...."

Wash sales are clearly a violation of the law, and against exchange rules. When they occur, they create fantasy liquidity. However, given the enormous volumes, I believe some cheetahs are engaging in this type of activity—that is, trading that arguably could qualify as "wash" trading under the CEA.

I’ve asked: Why would cheetahs do that? Are they trying to create fantasy liquidity in an effort to entice easy prey into the markets so that the cheetahs can pounce? That theory is something I’ve suggested we review at the Agency.

Here’s another theoretical answer to my question about why cheetahs might be engaged in creating fantasy liquidity: Many cheetahs are part of exchange market maker programs. Market maker programs pay traders for providing liquidity. When there’s lots of what is perceived as trading volume, it encourages others to trade. When there’s lots of liquidity, exchanges can boast their markets are deep and liquid. So, exchanges often pay cheetahs and other market makers to trade.

However, if a cheetah is truly washing the trades, they aren’t taking on any market risk whatsoever and they are violating the law. The fantasy liquidity may make it appear positive for exchanges, but the exchanges can’t allow that to occur.

By the way, wash trading is clearly unfair to other traders and, if it impacts price discovery, unfair to consumers.


Wash Blockers—For Cleaner Markets
So, one might think the exchanges would put in place what are called "wash blockers." And great, "wash blockers—for cleaner markets!" Guess what, proposed guidance from an exchange—the CME—on this issue is on the table right now.

You might think that as a regulator who has complained about voluminous wash sales that I’d be all for it. You exchange folks go to town—implement, implement, implement. But, whoa doggies, not so fast. What is it they are going to do exactly? How are they going to do it? Are all exchanges going to do the same thing? If not, does one exchange have a better idea than the other? Do we have a better idea? Are there any mitigating circumstances that the Commission needs to consider prior to allowing the exchanges to implement these wash blocker measures?

Well, for me, all of those questions, as well as a few others, need to be vetted internally before we allow the exchanges to self-certify and move forward.

My concern is the same concern that I’ve had with cheetahs and technology in markets, in general. We have all too often just accepted things that are occurring or that folks want to do. The results are that we see market SNAFUs all the time. I used to keep a list of all of the tech issues gone bad. It became too long. We need to take a deep breath and ensure that we know, to the best of our ability, what might occur. Regulators are always so darn reactive. Rather, we need to be more nimble and quick and think about what might be around the corner.

That’s why today, I’m suggesting that we take a chill pill on allowing the new wash blocker guidance without a more thorough review. I’m not saying in a few weeks or so we won’t give the go ahead. I’m just saying, right now there are simply too many unanswered questions that need to be addressed from an oversight and surveillance perspective, and potentially from an enforcement perspective.


Looking into your Dens
On that happy note, I guess I want to leave our fine furry cheetah friends with a message. You are the fastest predators in the market and we are watching you. That doesn’t mean we have all the tools or resources we need or want. We don’t. But, we are working on it. We have, as of fairly recently, developed the capacity to see trades in the milliseconds. That is, one-one-thousandth of a second. We can see what you are doing. We can see all of your trading, even when it is many, many times per second. We won’t stop at getting your instant messages, your emails or your text messages. We are going to come into your dens and look and analyze with experts your algo programs to see if you are violating the law. New regulatory world order, cats. If you are playing by the rules, and I know many of you are, all will be cool. You won’t have anything to worry about. If you aren’t playing by the rules, watch out. You can’t hide. We may be slower than you, but we are a persistent breed of our own.


Asante!
Finally, we all want efficient and effective markets that are devoid of fraud, abuse, manipulation and things like wash trading. Right? Right. That will make it better for everyone. It will make it better for other market participants, but it will make it better for consumers and our nation’s economy.

Asante! That means thanks. Asante, asante, guys. Thank you

MAN SETTLES WITH SEC REGARDING WASH SALES TO MANIIPULATE STOCK PRICES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Robert Crane for Market Manipulation

On February 26, 2013, the Securities and Exchange Commission filed a complaint charging Robert Crane, a former registered representative, with manipulating the market in two penny stocks-Argentex Mining Corporation and ERHC Energy Inc. The United States District Court for the Eastern District of Virginia entered the judgment to which Crane consented on March 4, 2013

The Commission's settled action, filed in federal district court for the Eastern District of Virginia, alleges that Crane executed six wash sales in June 2010 to create the false appearance of an active and liquid market for two securities. He placed his orders through the Internet for trades in three accounts at two brokerage firms. His trades resulted in no change of beneficial ownership in the stock he already owned. However, Crane did not profit from his scheme. The complaint alleges violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the Court's order permanently enjoins Crane from violating those laws. The Court's order also provides for a penny stock bar against Crane. The Commission did not seek a penalty against Crane due to his sworn representations concerning his financial condition.

CFTC CHARGES ROYAL BANK OF CANADA WITH WASH SALE SCHEMING

FROM CFTC
CFTC Charges Royal Bank of Canada with Multi-Hundred Million Dollar Wash Sale Scheme
CFTC also charges that bank concealed material information from, and made material false statements to, a futures exchangeWashington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of a complaint in federal district court in New York charging theRoyal Bank of Canada (RBC), a Canadian bank and financial services firm doing business in New York, with conducting a multi-hundred million dollar wash sale scheme in connection with exchange-traded stock futures contracts. The CFTC’s complaint also alleges that RBC willfully concealed, and made false statements concerning, material aspects of its wash sale scheme from OneChicago, LLC (OneChicago), an electronic futures exchange, and CME Group, Inc. (CME Group), the entity that exercised the regulatory compliance function for OneChicago.

From at least June 2007 to May 2010, RBC allegedly non-competitively traded hundreds of millions of dollars’ worth of narrow based stock index futures (NBI) and single stock futures (SSF) contracts with two of its subsidiaries that RBC reported as “block” trades on OneChicago.  The CFTC’s complaint alleges that RBC’s NBI and SSF trading activity, which accounted for the majority of OneChicago’s volume during the relevant period, constituted unlawful non-competitive trades, wash sales and fictitious sales.

Specifically, according to the CFTC’s complaint, RBC’s NBI and SSF trades were not negotiated at arm’s length between the counterparties to the trades, as required by law, but were instead designed and controlled by a small group of senior RBC personnel acting on RBC’s behalf.  The trading scheme was allegedly designed as part of RBC’s strategy to realize lucrative Canadian tax benefits from holding certain public companies’ securities in its Canadian and offshore trading accounts.

Prior to each trade, RBC allegedly identified stocks in U.S. and Canadian companies that RBC believed would generate a tax benefit.  RBC and a subsidiary allegedly bought and sold these stocks, and also bought and sold NBI or SSF futures contracts written on the stocks opposite each other.  According to the complaint, RBC’s futures trading was conducted in a riskless manner that ensured that the positions, profits and losses of each RBC counterparty washed to zero, in disregard of the price discovery principles of the futures markets, which resulted in a financial and position nullity for RBC while allowing it to reap the tax benefits.

In addition, the CFTC’s complaint alleges that, from at least January 2005 to April 2010, RBC unlawfully concealed material information from, and made false statements to, CME Group concerning RBC’s SSF trading activity.  Specifically, the complaint alleges that when RBC purported to describe the trades to CME Group, RBC falsely stated that its SSF trading was conducted at arm’s length between the counterparties to the trades, and concealed the fact that the trading strategy was created and managed by a group of senior RBC personnel acting on RBC’s behalf.  In addition, the complaint alleges that RBC concealed from CME Group the fact that it had intentionally designed its stock futures trading strategy to exclude non RBC-affiliated parties from RBC’s futures trades.

“A fundamental purpose of the futures markets is to provide an arm’s-length mechanism for market participants to discover prices and shift risks associated with products traded in those markets,” said David Meister, the Director of the CFTC’s Division of Enforcement.  “As we allege, RBC not only designed and executed a wash sale scheme that undermined that purpose, it went a step further and misled the exchange into believing that its conduct was lawful.  Today’s action should make clear that the CFTC will not hesitate to bring charges against even the most sophisticated market participants who unlawfully exploit the futures markets for their own gain.”

In its continuing litigation, the CFTC seeks civil monetary penalties and a permanent injunction against further violations of the Commodity Exchange Act and the CFTC’s Regulations, as charged.

The following CFTC Division of Enforcement staff members are responsible for this case: Susan Gradman, David Slovick, Lindsey Evans, Joseph Rosenberg, Joseph Patrick, Scott Williamson, Rosemary Hollinger and Richard Wagner.