United States: CFTC Proposes Consent Order To Resolve Price Manipulation And Spoofing Case

The CFTC submitted a proposed Consent Order to the U.S. District Court for the Northern District of Illinois that would resolve a civil enforcement action against Navinder Singh Sarao. The CFTC's action alleged that Mr. Sarao and his company engaged unlawfully in "spoofing" and price manipulation in connection with an E-mini S&P futures contract. In a recent press release, the CFTC noted that Mr. Sarao pleaded guilty in a related criminal action in the same court to one count of spoofing and one count of wire fraud.

The proposed Consent Order would require Mr. Sarao to pay more than $38 million in monetary sanctions and ban him permanently from trading and from registering with the CFTC. These penalties and restrictions would resolve the following alleged violations:

• successfully manipulating the E-mini S&P on at least 12 days between April 27, 2010 and March 10, 2014 (including May 6, 2010, which is commonly known as Flash Crash Day);
• attempting to manipulate the E-mini S&P tens of thousands of times between April 2010 and April 17, 2015;
• placing tens of thousands of bids and offers that he intended to cancel before execution (i.e., spoof orders) between July 16, 2011 and April 17, 2015; and
• employing or attempting to employ a manipulative device, scheme or artifice to defraud in connection with his spoof orders between August 15, 2011 and April 17, 2015.

According to the Complaint, the defendants placed thousands of orders to buy or sell E-mini S&P futures contracts that they did not intend to execute, in an effort to (i) mislead traders concerning the supply and demand of such contracts, and (ii) induce traders to buy or sell E-mini S&P futures contracts that they would not have traded otherwise.

The CFTC also alleged that the defendants' actions created a significant order imbalance, which contributed to a sudden loss of liquidity in the E-mini S&P and, in conjunction with other market events, "directly contributed to the E-mini S&P price crash."

When the CFTC announced that it was bringing an enforcement action against Mr. Sarao, it  asserted that his actions had caused the 2010 Flash Crash. This assertion was unsupported, as  disinterested observers' analyses demonstrated. The fact that Mr. Sarao may have done something illegal on the day of the Flash Crash does not demonstrate that his violation caused the Flash Crash. Through the proposed Consent Order, the CFTC asserts that Mr. Sarao engaged in the same type of illegal conduct thousands of times over a long period.  This indicates that his conduct on that particular day was habitual and did not cause the Flash Crash.

Despite all that, the CFTC refuses to give up this bone, as paragraph 59 of the CFTC Order demonstrates:

In short, the CFTC continues to assert that the Flash Crash was the result of a combination of (i) trading by Mr. Sarao (ii) "in conjunction with other market events" (i.e., everything else that happened in the market that day). It would have been better for the CFTC to concede that it doesn't know why something has happened so that it might deduce the answer later, or at least recognize the limits of current knowledge, rather than insisting that the cause has been found. The CFTC's continued pretense detracts from its own credibility, and can lead to false confidence with serious consequences. Lasting problems are not solved by counterfeit claims that they've been explained.

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