• Grand jury said to hear testimony related to 3Red's Oystacher
  • Spoof cases come after prosecutors founded Chicago fraud unit

Federal prosecutors are investigating whether a Chicago trader placed fake orders in an attempt to manipulate prices, said two people familiar with the matter, as the Justice Department broadens its effort to police the $30 trillion U.S. futures market.

A grand jury is hearing testimony in Chicago about possible commodities-market manipulation and in particular about the actions of Igor Oystacher, one of the people said. This comes on top of a regulatory probe and concerns raised in the past year by two exchanges about Oystacher, the co-founder of proprietary trading firm 3Red.

Oystacher couldn’t be reached through telephone numbers he has previously used. Steve Strohmer, 3Red’s chief operating officer, declined to comment on the possibility of any charges or make Oystacher available for comment.

Spokesmen for the Justice Department and FBI declined to comment.

The Oystacher investigation is the third in a year by the Justice Department related to spoofing, an attempt by traders to move prices by placing orders they never intend to fill and then canceling them.

  • What Is Spoofing? Quicktake

Chicago has become a hub for these matters. Federal prosecutors created a market-fraud unit last year in the city -- the birthplace of derivatives, and now a center of high-frequency trading firms that dominate futures markets -- thrusting them deeper into the complex workings of some of the world’s fastest-moving markets.

The empanelment of a grand jury in the city shows the Justice Department’s commitment to pressing the cases. Last month, a Chicago grand jury indicted Navinder Singh Sarao, alleging his spoofing attempts sparked the May 2010 flash crash that temporarily wiped out almost $1 trillion from the value of U.S. equities.

Largely Unchecked

The Justice Department is broadening its spoofing inquiries as futures-market participants complain that the practice is distorting pricing. 

The Dodd Frank Act of 2010 singled out spoofing as illegal. Still, several HFT firms and market makers have said the practice has gone largely unchecked by futures exchanges, which are authorized by Congress to self-police trading. The overall market is regulated by the U.S. Commodity Futures Trading Commission, which has worked with the Justice Department on other spoofing cases.

The CFTC, which can bring civil suits, has been conducting a parallel investigation of Oystacher. It is expected to file a complaint in its matter as soon as this month, according to a person familiar with the situation.

Oystacher, 33 years old, has dual U.S. and Russian citizenship, according to documents filed in a federal court in Northern Illinois related to a management dispute at 3Red. The firm -- with offices blocks from the Chicago Board of Trade and the Federal Reserve in Chicago’s historic financial district -- trades commodities, equities, futures, options and interest-rate products, according to its website. It also offers its workers on-site table tennis and catered meals, a Zen Room and Friday cocktails, according to the site.

Oystacher reached settlements in the past year with the two largest U.S. futures markets, CME Group Inc. and Intercontinental Exchange Inc., that together included payment of $275,000. CME, which looked into trading in futures based on crude oil and metals, barred Oystacher from trading for a month. ICE, which accused him of placing fake orders in an effort to sway futures on the Russell 2000 stock index, told him to stop the practice. Oystacher settled without confirming or denying wrongdoing.

Oystacher is in a separate legal battle with Edwin Johnson, with whom he co-founded 3Red. Documents filed in Chicago state court in that matter -- which isn’t related to spoofing -- revealed that Oystacher, Johnson and 3Red had been subpoenaed by the CFTC in 2012. The firm agreed to hand over trading records, and executives were interviewed in 2012 and 2013 by the regulator’s enforcement division, according to the court papers.

Johnson isn’t expected to be charged, according to a person familiar with the market-manipulation investigation. He declined to comment through his lawyer, Matt Vogler.

Tiny Increments

The Justice Department has stepped in as regulators have faced challenges establishing spoofing. In futures markets, HFT traders can program their machines to buy and sell thousands of contracts per minute. Spoofers can push prices in tiny increments by entering orders that create a false sense of demand, with the aim of withdrawing those orders and making an opposite bet milliseconds later to capitalize on the move.

There’s nothing wrong with canceling orders. What’s illegal is placing them with the intention of canceling them. Establishing such wrongdoing may require sifting through millions of orders.

The CFTC unveiled one of the biggest spoofing cases five years after the fact, when it accused Sarao of entering orders that helped spark the May 2010 flash crash. In April 2015, Sarao was the subject of a CFTC complaint and Justice Department charges. He has denied wrongdoing and is in London awaiting an extradition hearing.

Chicago prosecutors’ first spoofing case came against Michael Coscia, the head of Panther Energy Trading LLC. In 2013, Coscia and his firm paid$2.8 million to settle civil claims by the CFTC, without admitting or denying wrongdoing. The next year, he was indicted in Chicago on counts of commodities fraud and spoofing. Coscia, who has pleaded not guilty, lost a bid in April to have the case dismissed.

The U.S. Attorney’s Office in Illinois’ Northern District, in announcing the charges against Coscia in October 2014, said the case helped explain why it established its Securities and Commodities Fraud Section there earlier that year. “When the field is tilted by market manipulators, regardless of their speed or sophistication, we will prosecute criminal violations to help ensure fairness and restore market integrity,” it said in its statement.

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