Partner Jim Lundy and counsel Nicholas Wendland were quoted in “‘Spoofing Is Something You Should Pay Attention To.’ Oyez! Oyez!” by Thom Thompson in John Lothian News, reporting on their November 12 spoofing panel at FIA Expo 2020 with FIA’s chief legal officer and general counsel Allison Lurton.
Spoofing, according to Jim, is placing an order without the intention that it be executed. It is a relatively new violation, first codified in the 2010 Dodd-Frank Act.
Nicholas flipped the perspective and asked: What is not spoofing? Accidental orders or cancelations, good faith cancellations of partially filled orders and non-executable order types like RFQs (requests for quotes) and IOIs (indications of interest) do not constitute spoofing. Some order types that embed an automatic cancellation are not considered spoofing, including fill-or-kill, all-or-none and stop-loss orders.
Spoofing is market manipulation, according to Nicholas, because you are trying to influence the —market for your own benefit. The CFTC does not need to prove that the spoofer actually benefited from the spoof, just that the order was placed with the intention that it be cancelled.
Jim said that the cases litigated so far have in fact demonstrated patterns of behavior and included significant levels of trading activity. Successful DOJ and CFTC litigation has involved a number of trades and is typically supported with evidence — often emails — of manipulative intent. While a single action can be found to be spoofing, prosecutors are pursuing cases with patterns of activity.
To avoid suspicion and investigation, Jim says a surveillance and supervision program with a pronounced documentation aspect should be implemented. Investigations within firms should be undertaken as appropriate and should be documented.
Jim noted that the CFTC continues to bring a large volume of complaints, with an increasing focus on the firms, charging theories of a failure to supervise leveraging principal/agent. He said he was surprised by a 2018 case where the CFTC entered into non-prosecution agreements with two traders and then moved against the firm that employed them. Jim concluded that the days when compliance stayed away from management are long gone.