CFTC announces spoofing fine targeting Chicago HFT firm

CFTC announces spoofing fine targeting Chicago HFT firm

The CFTC announced that the Federal court in the Northern District of Illinois had levied the fine of $2.5 million against 3 Red Trading of Chicago, Illinois.

Bond price indications on the Toronto Stock Exchange, 2015. (Image via Wikipedia entry on Bond Trading, CC 4.0)

WASHINGTON, December 26, 2016 — The Commodities Future Trading Commission (CFTC) announced a fine for a trading company it accused of using “a manipulative and deceptive device while trading futures on four different futures exchanges.”

The CFTC announced that the Federal court in the Northern District of Illinois had levied the fine of $2.5 million against 3 Red Trading of Chicago, Illinois. According to a press release from the CFTC,

“Specifically, the Order finds that Oystacher and 3Red intentionally and repeatedly engaged in a manipulative and deceptive spoofing scheme while trading the spot-month contracts in the E-Mini S&P 500 futures contracts on the Chicago Mercantile Exchange (CME); crude oil and natural gas futures contracts on the New York Mercantile Exchange (NYMEX); copper futures contracts on the Commodity Exchange Inc. (COMEX); and the volatility index (VIX) futures contract on the CBOE Futures Exchange (CFE) on at least 51 trading days between December 2011 and January 2014.”

The CFTC first formally accused 3 Red Trading and its founder, Igor B. Oystacher, of deceptive practices in October, 2015.

Dodd-Frank, the landmark financial reform bill passed by Congress and signed into law, contains a section prohibiting spoofing, precisely what 3 Red Trading is accused of doing. In the case of financial instruments, spoofing is the practice, generally undertaken by high frequency traders (HFTs), whereby a plethora of buy or sell orders are placed by the HFTs’ high speed computers within a tiny window of time.

There is no intent to execute these orders, however. They are canceled or withdrawn in less than a second, in order to manipulate the price of the underlying the security when bid-ask spreads are accessed on slower computing and order taking systems. The offending HFT orders are recalled immediately after the price goes the way the trader wants while regular firms and individual traders are still seeing the essentially fake prices (spoofed prices) on their systems and buy and sell accordingly. The HFTs pocket the difference.

According to the CFTC,

“Oystacher and 3 Red next placed one or more aggressive flip orders at the same or better price on the other side of the market (sell/buy) using the avoid orders that cross functionality.”

A CFTC complaint filed on October 19, 2015 stated.

“As a result of the entry of the aggressive flip order(s), Defendants’ spoof orders at that price or better were immediately canceled using only one click or push of the button. Defendants’ cancellation of the spoof orders and ‘flip, to the other side happened almost simultaneously, taking place in less than or equal to 5 milliseconds (i.e., thousandths of a second).’

“Defendants’ use of the avoid orders that cross functionality not only prevented the flip orders from matching with the spoof orders, but also allowed Defendants to cancel the pending spoof orders and place aggressive order(s) on the other side of the market at the same or better price before other market participants could assess and react to the disappearance of the false market depth and book pressure the spoof orders had created.”

In all, 3 Red Trading spoofed 5,207 orders on five exchanges for a total of 359.790 contracts, according to the same complaint.

The five exchanges were, the E-Mini S&P 500 futures contracts on the Chicago Mercantile Exchange (CME); crude oil and natural gas futures contracts on the New York Mercantile Exchange (NYMEX); copper futures contracts on the Commodity Exchange Inc. (COMEX); and the volatility index (VIX) futures contract on the CBOE Futures Exchange (CFE)

Spoofing has been a point of concern for the CFTC since 2013 when it brought its first landmark case in coordination with the Britain’s Financial Conduct Authority (FCA) against Panther Energy Trading and its principal, Michael Coscia, of Rumson, New Jersey.

Coscia was convicted of spoofing in June 2016 and is currently serving a three-year sentence.

An email query by this CDN reporter to 3 Red Trading was not returned.

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