The pressing challenges posed by the pandemic and the deepest recession in living memory will soon shift attention elsewhere.
Nonetheless, it’s troubling to discover that a Wall Street titan was manipulating one of the world’s most liquid securities markets — U.S. Treasury futures — long after the practice was outlawed. This shows how traders often remain fixed in their old ways. Keeping behavior in check is incredibly difficult even for those banks that can afford the most sophisticated surveillance.
Years after global lenders were caught rigging interest-rate benchmarks and currency markets, costing them billions of dollars in fines, their employees were still finding ways to work the markets to their own advantage. Once regulators catch up with one practice, traders seem to simply find another way.
Spoofing — placing a bid or offer with the intent to cancel it before executing — became illegal under the 2010 Dodd-Frank Act. In JPMorgan’s case, the practice appears to have been widespread. During the years covered by this case, between 2008 and 2016, the bank’s traders placed hundreds of thousands of spoof orders, according to the Commodity Futures Trading Commission, which helped lead the investigation.
Specifically, the company admitted to being responsible for 15 traders’ wrongdoing when they placed orders they didn’t intend to execute in the precious metals and Treasury markets. Half a dozen employees face charges for manipulating gold and silver futures and the bank has entered a three-year deferred prosecution agreement over two counts of wire fraud.
In fairness, it was always going to take a while for the finance industry to adjust to the spoofing ban. Traders are allowed to place and cancel orders, and masking their real intent is how the market has always worked. A trader wants to conceal their own strategy to secure the best price. What is going on in their minds — whether an order is genuine or not — can be very hard to prove, not least given how quickly markets move and positions are adjusted.
What’s more, spoofing did at least keep a check on so called “front-running” by machines. Traders aided by algorithms are profiting by gleaning the intentions of other market players and jumping in front of their orders. High-frequency traders trying to front-run another trader can get caught out if they respond to a spoof.
Some of the precious metals team at JPMorgan were indeed attempting to counter the algos, according to prosecutors, as our colleague Tom Schoenberg detailed in his gripping account of the goings on at the desk. Electronic trading has made spoofing easier across markets because it has become harder to see who is behind the orders.
But the JPMorgan employees accused of spoofing were taking some large gambles, a sign perhaps of how comfortable they were in being able to pull them off. In one example, a trader placed a genuine order to buy 50 lots of the 10-year Treasury note futures contract with Dec. 2011 expiry and a spoof order for 3,000 lots on the sell side of the market, a trade potentially worth more than $250 million.
At the time, JPMorgan’s surveillance systems lacked the ability to identify spoofing, according to the CFTC. But the regulator said that the firm’s efficacy at rooting out bad behavior didn’t improve much afterward either. After a new surveillance tool was introduced in 2014, the bank still overlooked internal alerts, as well as separate inquiries from the exchange and the CFTC and allegations of misconduct from one of its traders.
Regulators are onto something. While banks have invested billions in controls, they’re still failing to process the hundreds of thousands of alerts and false positives of suspicious conduct — from insider trading to spoofing — that they need to sift through every month. Unless the downside of getting caught becomes a bigger threat to those involved and responsible, rooting out wrongdoing may not get much easier any time soon.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.