The Commodity Futures Trading Commission (CFTC) in May 2023 levied a $45 million fine against a tier-1 bank for engaging in spoofing in the US dollar swaps market, other deceptive and manipulative trading practices related to the bond issuer swaps market, and communication recordkeeping failures for mobile devices. This enforcement action is notable for applying long standing spoofing rules to a voice-brokered market and against a registered swap dealer and shows the CFTC’s continued focus on combating well-known patterns of market manipulation.
The CFTC’s enforcement order explains that over several months a trader provided bids or offers to a swap execution facility (SEF) with the intent to cancel the orders before execution, and the trader did so to control the prices shown on the brokers pricing screens and to prevent prices from moving in an unfavorable direction. The order says that “neither the market activity nor the communications were flagged by any surveillance system.” CFTC Commissioner Kristin Johnson noted that the firm “failed to establish policies and procedures to prevent or detect this sort of misconduct.”
In addition to the fine, the firm had to take a series of remedial measures as part of its cooperation with the CFTC. These included enhanced policies on order handling, pre-hedging, and spoofing, and improved internal escalation procedures and employee training.
Importantly, the firm had to strengthen its trade surveillance tools to identify concerning trading behavior, such as spoofing.
Validus in Practice
The Validus spoofing detection alert is one of the most widely used on the Validus Trade Surveillance platform and is flexible to capture potential issues in the swaps market. Validus can be configured to identify spoofing and layering activity taking place over any period of time, such as 10-15 seconds (as what happened in a prior CFTC enforcement case) and across a range of parameters tailored to the firm, including for manually or automatically submitted orders.
The Validus spoofing alert is configurable for greater sensitivity based on a firm’s needs, which may generate more candidate alerts and detect what had previously been missed. To handle this higher volume of alerts, Validus uses robotic process automation (RPA) for efficient processing plus a machine learning model to assign a probability score. This method presents only the highest-risk alerts to a firm’s trade surveillance analysts while maintaining an audit record of all the rest. The Validus Market Visualizer also assists compliance teams in more quickly identifying manipulative trading patterns, like spoofing and layering.
Spoofing is a form of market manipulation in which a trader submits a bid or offer in a security or commodity on an exchange or other trading platform with the intent to cancel the bid or offer before it can be executed. Layering is like spoofing but with multiple submitted bids or offers at different levels of the order book.
About Eventus
Eventus is a leading global provider of multi-asset class trade surveillance, market risk and algo monitoring solutions. Its powerful, award-winning Validus platform is easy to deploy, customize and operate across equities, options, futures, foreign exchange (FX), fixed income and digital asset markets.
Validus is proven in the most complex, high-volume and real-time environments of tier-1 banks, broker-dealers, futures commission merchants (FCMs), proprietary trading groups, market centers, buy-side institutions, energy and commodity trading firms, and regulators. The company’s rapidly growing client base relies on Validus and Eventus’ responsive support and product development teams to overcome its most pressing regulatory challenges. For more, visit www.eventus.com.