Bats Global Markets Inc. wants to stop spoofing faster on its stock exchanges.
The company is seeking permission to act within weeks against traders using the manipulative technique and a related one called layering, rather than handing off the case to regulators -- which can be a lengthy process. Its main U.S. regulator, the Securities and Exchange Commission, has to approve the request.
“Manipulation is not common, but when we see it, we want to be able to act on it instantly,” Bats Chief Executive Officer Chris Concannon said in a phone interview. “This rule allows for that instantaneous response to clear manipulation that we see in our markets.”
Allegations of spoofing and layering have churned through the market for years. They entered the popular lexicon in 2015 after U.S. prosecutors accused Navinder Singh Sarao of spoofing CME Group Inc.’s futures market for years.
Concannon said current rules are a “very blunt instrument that requires brokers to surveil their clients’ activity under the threat of a fine.” On the other hand, the Bats proposal is a “regulatory sharp-shooter,” he added. “We can now identify a specific client whose behavior is disruptive and immediately tell the broker to take out that client under the threat of termination of the broker’s access to our exchanges.”
Exchanges like Bats work with the Financial Industry Regulatory Authority to monitor their markets for suspicious trading activity. Finra can launch investigations and take action against its members and may involve the SEC if a case falls outside its jurisdiction.
In some instances, a resolution may not be reached until years after the manipulative activity began.
“Finra is extremely supportive of Bats’s efforts to take swifter action to combat manipulative trading,” Finra spokesman George Smaragdis said by e-mail. “Finra believes that Bats’s proposal has the potential to significantly alter behavior in the marketplace, and Finra staff is actively considering a similar measure.”
As part of its justification for seeking the change, Bats referred to the case of Sarao, who is awaiting extradition to the U.S. from the U.K.
“Mr Sarao’s allegedly manipulative trading activity, which included forms of layering and spoofing in the futures markets, has been linked as a contributing factor to the ‘Flash Crash’ of 2010, and yet continued through 2015,” the exchange said in its filing.