“Banging the Close”? “Spoofing”? Call It What You Want – It’s Illegal And The CFTC Will Catch You…

Earlier this month, the Commodity Futures Trading Commission sued Donald Wilson and his company, DRW Investments, for manipulating the IDEX USD Three-Month Interest Rate Swap Futures Contract, using two methods known as “banging the close” and “spoofing.” Attorney Felix Shipkevich of Shipkevich PLLC explains:

“The CFTC defines ‘banging the close’ as: a manipulative or disruptive trading practice whereby a trader buys or sells a large number of futures contracts during the closing period of a futures contract (that is, the period during which the futures settlement price is determined) in order to benefit an even larger position in an option, swap, or other derivative that is cash settled based on the futures settlement price on that day. […] The CFTC [defines] … “spoofing” as: bidding or offering with the intent to cancel the bid or offer before execution.”

That’s precisely what regulators say Wilson and DRW did over the course of eight months in 2011 to prevent prices from defaulting to the unfavorable prevailing interest rates – and increase their own profits – writes Robert Fallon of law firm Leonard, Street and Deinard:

“Wilson and DRW ‘banged the close’ and ‘spoofed’ the 15-minute PM Settlement Period from January 2011 to August 2011.  They ‘banged the close’ by repeatedly placing bids [nearly 60% of the bids and on 13 days all their bids] during the Settlement Period.” […] “They ‘spoofed’ by entering into those bids with no intent of consummating those transactions. According to the CFTC, DRW cancelled those bids after prices were set during the Settlement Period so that ‘DRW would [not] have to actually enter into a futures contract and pay the higher rates that it bid.’”

The takeaway for traders? Straight from the enforcer’s mouth:

“In commenting on the suit, acting CFTC Enforcement Director Gretchen Lowe, said, ‘Traders cannot engage in manipulative acts to affect the price of futures contracts to achieve their desired profits, regardless of the so-called motive. Today’s action demonstrates that the Commission will vigorously prosecute such cases to protect the integrity of the markets.’”

In plain English: we will come after you if you cheat…

The updates:

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