The Commodity Futures Trading Commission has charged Citigroup with placing large futures market orders with the intent of immediately cancelling them, calling the practice of “spoofing” a “significant threat to market integrity.”
Citigroup agreed to pay $25 million to settle the first-ever spoofing charges against a bank. According to a CFTC order, five of its traders engaged in spoofing more than 2,500 times in various U.S. Treasury futures products between July 2011 and December 2012.
The alleged spoofing involved placing bids or offers of 1,000 lots or more with the intent to cancel those orders before execution, the commission said, adding that the strategy created a false appearance of market interest in a commodity or other financial instrument.
“Spoofing is a significant threat to market integrity,” CFTC Director of Enforcement Aitan Goelman said in a news release.
He stressed that commodity trading firms “must provide their employees with sufficient training and have in place adequate systems and controls to detect spoofing.”
The CFTC said the Citigroup traders would place a spoofing order after another smaller bid or offer was placed on the same or a correlated futures or cash market, allowing them to “create or exacerbate an imbalance in the order book.”
“This created the impression of greater buying or selling interest than would have existed absent the spoofing orders and was done to induce other market participants to fill the traders’ smaller resting orders on the opposite side of the market from the traders’ spoofing orders in advance of anticipated price changes,” the CFTC alleged.
According to the CFTC, a Citigroup supervisor was alerted to a spoofing incident in January 2012 when a junior trader in its Tokyo office placed a 4,000-lot offer in the 10-year U.S. Treasury futures market but was unable to cancel the order before most of the lots traded, resulting in a trading loss.
Although the supervisor cautioned the trader not to spoof again, “neither the supervisor nor the other members of the U.S. Treasury desk reported the incident to compliance or any other senior manager,” the CFTC noted.