CFTC Charges Trader for Prearranged Trading on CBOT

This week the CFTC announced (click here) an enforcement action against a day trader for engaging in a fictitious trading scheme on the CBOT venue of the CME (the full complaint may be found here). The salient details of the case are as follows:

• Beginning in October 2021, the trader entered into at least 33 fictitious, non-competitive sales, involving 410 futures contracts, with Trader A (who it transpired is the trader’s cousin). The trader’s account was frozen by the FCM due to the suspicious behaviour;
• The fictitious trading scheme focused on three agricultural futures contracts (SRW Wheat Futures, Oats Futures and Soybean Futures) on CBOT;
• The trader and Trader A coordinated trading in the above futures which were extremely illiquid contracts. They intentionally and specifically targeted futures contracts trading with low trading volumes, which they could reliably trade with each other, rather than with an unrelated third party;
• The two traders worked in tandem, coordinated their trading, and synchronized their fictitious sales by communicating in real time about their bids and offers;
• The accused trader would enter orders in the agricultural Futures and then, based on the trader’s instructions, Trader A would place her own orders in those futures, aggressively “pricing into” the trader’s order by crossing the bid/ask spread;
• This allowed the trader to buy the futures at prices lower than other market participants (and sell futures contracts at higher prices) purposefully coordinating their activity to fall within a wide bid/ask spread;
• The traders intentionally executed their orders during periods of low overall trading volume with the express purpose of finding and matching each other’s opposite orders on CME Globex, the CME’s execution platform;
• The complaint provides a detailed example of the alleged behaviour which took place on 1 November 2021:

1. In the middle of the night at 12:40 a.m. (00:40:41.322, as represented in the CBOT trading data; all times are expressed in Central Time) on the above date, the trader placed an order to sell 15 contracts of July 2024 SRW Wheat Futures at USD $7.2875 per bushel (there are 5,000 bushels per contract);
2. Almost simultaneously, at 12:41 a.m. (00:41:12.324), Trader A placed an order to buy 10 contracts of July 2024 SRW Wheat Futures, at USD $7.29 per bushel, through her account ending in -3297 at FCM No. 2;
3. The two orders instantly matched on the CBOT at USD $7.2875 for 10 contracts starting the fictious sale scheme;
4. Around thirty-eight seconds later, at 12:41 a.m. (00:41:50.451), the traders placed another order to buy 10 contracts of July 2024 SRW Wheat Futures at USD $7.1625 per bushel;
5. Less than a minute after that, at 12:42 a.m. (00:42:43.843), Trader A placed an order to sell 10 contracts of July 2024 SRW Wheat Futures at USD $7.16 per bushel;
6. The two orders for 10 contracts matched immediately on the CBOT at 12:42 a.m. (00:42:43.843) for USD $7.1625, thereby consummating the fictitious sale.

• The above series of trades resulted in approximately USD $6,250 in profits being transferred from Trader A’s Account into the accused trader’s account. In total, the trader repeated these non-competitive, fictitious sales at least 33 times with Trader A between October and November 2021, resulting in the illegal trading of 410 Agricultural Futures Contracts;
• Through this illegal scheme, the trader is alleged to have successfully coordinated the transfer of at least USD $159,000 in profits from Trader A’s Account to his own account.

The trader was found by the CFTC to have violated the following rules:

1. Section 4c(a)(2)(A)(ii) of the Act, 7 U.S.C. § 6c(a)(2)(A)(ii) (Title 7 of the Code of Federal Regulations); and
2. Regulation 1.38(a), 17 C.F.R. § 1.38(a). (Commodity Exchanges Act rule requiring competitive execution).

The CFTC is seeking a permanent injunction banning the trader from trading, directly or indirectly, on any regulated venue as well as the disgorgement of profits illicitly earned through the scheme. The complaint also requests that a civil penalty be ordered along with costs and fees in relation to the court action.

 RegTrail Insights

While prearranged trading is frequently detected and penalised through the CME’s own disciplinary apparatus, it appears that the scale of the activity in this case played a role, at least in part, in the CFTC becoming involved. The case detail provides useful insight into the triggers initially identified, it is assumed, by the CME surveillance team who seldom provide such granular detail in their respective Disciplinary Notices.