The Spoofing Traders Who Were Ordered to Pay $9 Million

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Three Hungarian traders and a Swiss investment firm must pay about 7.5 million pounds ($11.7 million) after a London judge said they profited from “spoofing,” the practice of placing and then canceling orders to mislead the market.

Szabolcs Banya, Gyorgy Szabolcs Brad, Tamas Pornye and Mineworld, a Seychelles company they set up to trade derivatives, were ordered to pay a total of about 6 million pounds, Judge Richard Snowden said in a written decision. The case was filed by the U.K. Financial Conduct Authority, which has been investigating the matter as far back as 2011.

Spoofing allows traders to place multiple orders that affect a security’s price but that are never completed. The practice attracted global attention when U.S. prosecutors accused a British trader, Navinder Singh Sarao, of helping cause a $1 trillion “flash crash” in markets on one day in 2010.

The three “must have known full well what they were doing” and “were well aware that what they were doing was wholly improper,” Judge Snowden said Wednesday.

Da Vinci Invest Ltd. was given a 1.5 million-pound penalty even though its managers didn’t know about the market abuse, because they should have monitored the traders more closely, Judge Snowden said.

Da Vinci said in a statement that the judge had cleared its management of knowledge or suspicion of manipulative trading carried out by its partners in the Hungarian joint venture. The penalty may expose asset managers who outsource trading to additional regulatory risks, Da Vinci said.

Goldman Sachs Report

Goldman Sachs Group Inc. acted as broker for Da Vinci for a short period in 2010 before terminating the relationship and filing a suspicious transaction report to the U.K. regulator about the trades. BATS Global Markets Inc., the exchange on which the Hungarians traded, also filed alerts to the FCA.

Although the three traders didn’t take part in the trial, they initially filed documents saying that the trading patterns were caused by an algorithm they used in 2010 and 2011, according to Judge Snowden. They destroyed the algorithm when the FCA began investigating, he said.

John Bechelet, a London lawyer who used to represent Banya, Brad and Pornye, said he would pass on a request for comment.

‘Irresponsible and Reckless’

While Da Vinci director Hendrick Klein wasn’t aware of the market abuse, the firm never made any attempt to check what they were doing and its approach was “irresponsible and reckless,” Judge Snowden said.

Dr. Michael Aitken from Macquarie University in Sydney testified during the trial that he had never seen such a clear pattern of manipulation.

“They were basically on one side of the book, giving the impression that they were going to do one thing, and then did the other,” Aitken said in comments cited in the ruling.

The FCA said it was the first time it had asked a High Court judge to issue a penalty and a permanent injunction restraining future market abuse.

“This was a sophisticated form of abuse that took place across multiple trading platforms,” Georgina Philippou, the FCA’s acting director of enforcement and market oversight, said in a statement.

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