Bridging the Week by Gary DeWaal: November 7 to 11 and November 14, 2016 (Spoofer Pleads; Pre-Hedging Futures Blocks; Form 40 and Reg AT Again; President Trump)

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Published Date: November 13, 2016

Last week, Navinder Singh Sarao – accused by both the Department of Justice and the Commodity Futures Trading Commission of engaging in spoofing-type conduct that contributed to the May 6, 2010, “Flash Crash” – pleaded guilty to his DOJ criminal charges and proposed to settle his CFTC civil action, following his extradition to the United States from the United Kingdom. In addition, ICE Futures U.S. once again proposed revisions to its Frequently Asked Questions related to the possible pre-execution hedging by principals to a futures block trade. And of course, Donald J. Trump won the election to be the next United States president. As a result, the following matters are covered in this week’s edition of Bridging the Week:

Video Version:

Article Version


Legal Weeds: In his proposed CFTC settlement, Mr. Sarao admitted that, in order to effectuate his spoofing activity, he arranged customization of an unnamed “off-the-shelf” trading platform. The CFTC had charged that, in working with computer programmers on this customization, Mr. Sarao evidenced “an intent to use two algorithmic trading programs to place orders (1) with no intention of executing those orders; and (2) with an intention to affect E-mini S&P market prices.” Importantly, in charging Mr. Sarao and his company, the CFTC did not reference the actual source code underlying his customization; rather, it quoted from email between Mr. Sarao and his programmers to show instructions for them to develop functionality to allow him to engage in his illicit layering and spoofing activity. The CFTC also described the behavior of the two trading programs principally employed by Mr. Sarao. This is consistent with how the CFTC approached its settlement with Michael Coscia, who ultimately was also convicted of spoofing by a jury in a federal court and sentenced to three years imprisonment following the filing of a criminal action by the US Attorney’s Office in Chicago. (Click here for details in the article, “Jury Convicts Michael Coscia of Commodities Fraud and Spoofing” in the November 8, 2015 edition of Bridging the Week.) In its Order Instituting Proceedings and Making Findings against Mr. Coscia, the CFTC described the behavior of an algorithm he used “designed to rapidly place bids and offers in the market and to cancel those bids and offers prior to execution.” There was no reference to source code. (Click here for a copy of the CFTC’s Order against Mr. Coscia and Panther Energy Trading LLC, a company he owned and controlled.)

My View: It appears that the CFTC is well-equipped using its existing arsenal of current laws and regulations to investigate potential market manipulation and other disruptive trading, including potential spoofing, without any greater access to source code as it currently seeks under proposed Regulation AT.

My View: Currently, there are three very similar but slightly different variations of block trade guidances outstanding that address what is permissible pre-hedging of block trades by principals to a transaction: what ICE Futures U.S. has just proposed; what CME Group has adopted based on IFUS language currently in place; and what NASDAQ Futures has adopted (Click here for details in the article, “Pre-Hedging by Principals Authorized in Block Trade Clarification Implemented by IFUS and Adopted by CME Group” in the October 30, 2016 edition of Bridging the Week and here for the article, “NASDAQ Futures Adopts Block Pre-Hedge Guidance Similar to CME Group and IFUS” in the November 6, 2016 edition of Bridging the Week.) The three exchanges should, as soon as possible, provide clarification regarding the meaning of their guidances and the significance of any subtle differences in language. My expectation is that this will happen in some form shortly.

And more briefly:


My View: Due to the difficulty navigating the CFTC’s website to find the portal used to input the revised Forms 40 and 40S (in order to test the process of submitting the new forms); the lack of a standalone draft new Form 40 easily identifiable on its website; and the ambiguity of some of the new questions on the Form 40, it seems only fair and reasonable for the CFTC to delay the effective date of new Forms 40 and 40S requirements. Reportable traders should make a request for such delay urgently.

And finally:

For more information, see:

Additional Musings on the CFTC’s Supplemental Proposal Regarding Regulation AT:

Alleged Flash Crash Spoofer Pleads Guilty to Criminal Charges and Agrees to Resolve CFTC Civil Complaint by Paying Over $38.6 Million in Penalties:

CFTC Approves Final Rule Regarding Timing of CCO Annual Reports for FCMs, SDs and MSPs:

CME Fines Two Non-Members for Prearranging Transactions to Transfer Equity Between Accounts:

Jun Jin:
Diego Di Stefano:

One More Time – ICE Futures U.S. Proposes Revision to Futures Block Trade Guidance to Permit Pre-Hedging:

The Sun Did Come Out Tomorrow – Conjecture on Financial Services Regulation in the Trump Years:

Where, Oh Where Is the CFTC New Form 40 Portal?:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of November 12, 2016. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP may represent one or more entities mentioned in this article. Quotations attributable to speeches are from published remarks and may not reflect statements actually made.

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Gary DeWaal

Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office focusing on financial services regulatory matters. He provides advisory services and assists with investigations and litigation.

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