Allston Accused by HFT Rival of Manipulating CME PricesMatthew Leising and Saijel Kishan
High-frequency trading firm Allston Trading LLC was accused by a competitor of manipulating prices on CME Group Inc.’s exchange, three people with knowledge of the proceeding said.
HTG Capital Partners LLC filed an arbitration case against Allston with CME, saying it detected a pattern of canceled bids and offers meant to mislead other traders into moving prices favorably for Allston, according to the people, who asked not to be identified because the case is private. Exchanges prohibit creating the appearance of false demand and then canceling orders, a practice known as spoofing.
“Allston is committed to the highest standards of integrity and compliance,” Ellen Resnick, an Allston spokeswoman, said in an e-mailed statement. “The allegations made by a competitor are based on incomplete and inaccurate information, and the firm believes that the matter will ultimately be resolved in its favor.”
The complaint comes amid heightened scrutiny of high-frequency traders that buy and sell securities or derivatives at speeds measured in millionths of a second. New York Attorney General Eric Schneiderman is examining automated trading and other regulators are examining whether the traders benefit unfairly from better access to data or incentives.
Allston, whose tagline is “Enriching Lives. Advancing Markets,” was co-founded more than a decade ago by futures traders Bob Jordan, Elrick Williams and John Harada and is now run by Chief Executive Officer Raj Mahajan, who joined the company two years ago.
“We sit at the intersection of financial strategy and high-technology,” trading on exchanges around the world, the Chicago-based company says on its website. Earlier this year, it hired Jill Sommers, a former member of the Commodity Futures Trading Commission, to serve on its board of managers.
Resnick declined to make anyone from Allston available for an interview. Drew Mauck, a spokesman for HTG, declined to comment, as did CME Chief Operating Officer Bryan Durkin.
CME is one of many exchanges where Allston executes its strategies. Owner of the Chicago Mercantile Exchange and New York Mercantile Exchange, CME is the world’s biggest futures market, with contracts allowing bets on interest rates, U.S. stock prices, Treasuries and oil.
Spoofers try to make money by feigning interest in buying or selling at a certain price, creating the illusion of demand in an attempt to get other traders to move the market in a way they can profit from. The spoofer cancels the original trade before it’s executed, and buys or sells at the new price. It’s sometimes called “pull and hit” for this reason.
CME has an arbitration system where clients can resolve disputes with each other. That’s where HTG is pursuing its complaint against Allston.
Separately, in a rule submission with the CFTC, CME on Aug. 28 clarified what constitutes spoofing on its markets.
“No person shall enter or cause to be entered an order with the intent, at the time of order entry, to cancel the order before execution or to modify the order to avoid execution” in an effort to prohibit “the type of activity identified by the Commission as ‘spoofing,’” CME told the CFTC in a letter. The rule will be reviewed by CFTC, and if no objections are raised, it will become effective on Sept. 15.
Spoofing was defined for the first time in the 2010 Dodd-Frank Act as “bidding or offering with the intent to cancel the bid or offer before execution.” Some trading firms have found that definition too vague and have pressed CME to create a more detailed definition, according to two people familiar with the matter.
While the exchange has always prohibited spoofing, this is the first time CME has addressed it specifically in a rule filing, according to Durkin, the chief operating officer.
“In time, we’ve added greater clarity to spoofing,” he said in a phone interview. Durkin said the Aug. 28 filing reflects a process that has been evolving over time. The rule filing is “to give a great deal of specificity to the marketplace,” he said.
It isn’t clear how much detail HTG’s complaint goes into. According to a person with knowledge of the matter, HTG suspects a software update implemented last year by the CME may be used in some spoof trades. The system, known as self-match prevention, keeps firms from trading with themselves.
In this week’s rule filing, CME said improper use of its self-match prevention system “in a manner that causes a disruption to the market may constitute a violation” of exchange rules.
Wash trades, as they’re called, aren’t allowed by exchanges because they can be used to manipulate prices. Last year, CME implemented software that prevents wash trades by automatically canceling an offer to buy a futures contract if that bid is going to trade against a sell order placed by the same firm. The use of the self-match prevention tool is optional for CME’s customers.
A firm seeking a way to automatically cancel offers it never intended to execute could intentionally trigger the wash-trade halt, according to the three people who trade on the CME and asked not be named because they’re not authorized to speak publicly. Because the cancellation is done by CME’s own computer system, other traders can’t see that a bid has been withdrawn, they said.
Before competitors can decide to change their offer to buy, a spoofer could place a sell order into the market which will leave the traders with valid bids owning futures in a now falling market, the people said. To exit those trades, they need to sell back their contracts at a loss to the firm on the other side.
“Allston has a comprehensive compliance program designed to ensure adherence with the evolving laws and exchange rules and is confident that its approach represents best practices in the industry,” said Resnick, the Allston spokeswoman. “The firm uses self-match prevention tools to prevent self-trading, not for any other purposes.”
Determining that someone is illicitly deceiving the market with false orders requires establishing motive, said David Meister, head of the government enforcement and white collar group in New York at Skadden Arps Slate Meagher & Flom LLP. Meister spoke generally and had no knowledge of HTG’s proceeding.
“When you’re entering the order you have to have an intent to cancel the order to fit under the definition of spoofing,” Meister, the former director of enforcement at the CFTC, said in a telephone interview. “You can change your mind a split-second after you put the order in and that’s not spoofing if you didn’t have the intent to cancel beforehand.”
Last year, Panther Energy Trading LLC and sole owner Michael Coscia were ordered to pay $4.5 million to U.S. and U.K. regulators to resolve allegations that they spoofed commodities markets. The enforcement action was the CFTC’s first under Dodd-Frank Act authority to target disruptive trading practices.
In April, the SEC charged Joseph Dondero, who co-owns Holmdel, New Jersey-based Visionary Trading LLC, of engaging in spoofing and another illegal practice known as layering. Dondero, his firm and three co-workers agreed to pay about $2.5 million to settle the matter.