Alston Trading is under investigation for market manipulation by the CFTC. The derivatives regulator sent a subpoena to CME Group, the largest derivatives marketplace running the CME, CBOT, NYMEX and COMEX, according to Bloomberg. The investigation follows last year’s accusations against the high-frequency trading firm by one of its competitors regarding spoofing.
A trader is spoofing when they submit orders to an exchange with the goal of swaying prices and no intention of having the orders filled. They use the illusion of supply and demand to influence other traders to act and then cancel their order before anyone can trade with them.
The Dodd-Frank Act made spoofing illegal. It defined the practice as bidding or offering with the intent to cancel the bid or offer before execution.
A October 2014, a federal grand jury indicted a commodities trader in the first criminal case involving spoofing of the commodities markets. The trader was accused of six counts of commodities fraud and six of spoofing related to orders placed in 2011. He previously paid a $2.8 million fine to the CFTC in 2013.
The Bloomberg article indicates that spoofing is a growing concern for regulators. In November, the Commodity Futures Trading Commission told the New York Mercantile Exchange and the Commodity Exchange that they may not have the capacity to detect this illegal high-speed trading practice in a trade practice enforcement review. The CFTC found that nine of the ten investigations by the CME in the year starting July 1, 2012 did not start with detection by their internal programs.
With expectations that regulators will further regulate high-frequency trading firms, this could very well be an area that we will hear a lot more about. Dodd-Frank authorized the SEC and CFTC to pay whistleblower awards for violations of the securities laws. As competitors determine that their competition is taking advantage of them in the markets, they may opt to take the battle off the marketplace and to the regulators for assistance.