A commodity trading firm settled CFTC charges for engaging in wash sales and noncompetitive transactions traded on the Chicago Board of Trade and the Chicago Mercantile Exchange, Inc. ("CME").
The Order found that Eagle Market Makers, Inc. ("Eagle"), a proprietary trading firm that trades agricultural and Eurodollar futures, negated market risk and price competition by taking part in wash sales and noncompetitive transactions. Specifically, the Order stated that Eagle traders entered Offsetting Orders during the pre-trading period known as the "Lockdown" when orders can be entered, but not canceled. Eagle did this, according to the Order, as a way to offset bids previously entered that they no longer wanted due to a change in market conditions, and that could no longer be canceled. As a result, once the market opened, the Offsetting Orders offset the original bids or offers.
The CFTC settled for $350,000 and ordered Eagle to cease and desist from further violating the Commodity Exchange Act and CFTC Regulations.
In a parallel action, the CME ordered Eagle to pay $150,000 for engaging in wash sales and noncompetitive transactions that are the subject of the CFTC Order.
Commentary / Bob Zwirb
The two settlements in turn raise two interesting issues: 1) the standard for establishing intent, and 2) the policy underlying parallel enforcement actions.
Wash trades involving resting buy and sell orders may create legal vulnerability for traders that place such orders electronically in a less than careful manner. That is because while wash trading requires scienter, it doesn't require much under the CME standard. As the CME guidance states, if parties have "a reasonable expectation that their resting buy and sell orders may match when the market opens," then a wash sale occurs (emphasis added). While the trading here appears to have been intentionally structured to achieve a wash result, that may not always be the case with respect to orders that eventually match.
As for the second issue, while the CFTC and the exchanges clearly have the authority to conduct parallel or concurrent enforcement actions for the same conduct, see Allan Horwich, Warnings to the Unwary: Multi-Jurisdictional Federal Enforcement of Manipulation and Deception in the Energy Markets after the Energy Policy Act of 2005, 27 Energy L. J. 363, 392 (2006) (observing that the same conduct may be subject to multiple regulatory enforcement proceedings), it is not clear that doing so represents the best use of limited enforcement resources. At least here, the CFTC took into account, and reduced its penalty to reflect the fine imposed by the CME. Nevertheless, from a resource allocation perspective—dividing, rather than duplicating—labor among regulators would seem to be a better use of limited resources.
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