Spoofing Cases From Oystacher's Past Prove Intent, CFTC Saysby
Government plans to call German regulator as witness
Exchange fines total $660,000 for Oystacher in past years
Fines levied against 3Red Trading LLC’s Igor Oystacher by the world’s largest futures exchanges prove he intended to rig markets, according to U.S. regulators seeking to use those penalties as evidence in their own lawsuit against the trader.
Oystacher was sued in October by the Commodity Futures Trading Commission, which accused him of spoofing, saying that he canceled orders within a second of entering them -- a sign he could be illegally tricking other traders by creating a false impression of demand. His lawyers argue his exceptional reasoning skills and reaction time -- as well as his prowess at speed-chess and customized computer equipment like a mouse with souped-up right-click and left-click buttons -- are the reason he’s faster than most humans at executing trades.
Oystacher has been fined $660,000 in enforcement actions brought by three futures exchange operators: CME Group Inc., Intercontinental Exchange Inc. and Deutsche Boerse AG’s Eurex. In each case, Oystacher neither admitted nor denied wrongdoing. Those companies conducted eight spoofing investigations into Oystacher over a four-year period, the CFTC said in an April 15 court filing that laid out why it wants to be able to use those cases in its civil trial against Oystacher.
The CFTC wants to submit those cases as evidence as it seeks to ban Oystacher from trading during the lawsuit in federal court in Chicago. Regulators allege he’s continued to cheat this year. Oystacher’s lawyers have argued against that preliminary injunction, and a hearing on the issue is scheduled to begin April 25.
“The CFTC knows very well that the exchanges settled their investigations without any finding of wrongdoing, because there was none,” Tom Becker, a spokesman for Oystacher, said in an e-mailed statement. “Oystacher denies he ever spoofed.”
The CFTC can’t use the exchange findings to back up their own spoofing allegations, because they’re different instances of alleged cheating. Instead, the CFTC wants to use the exchange cases to show a pattern of intent by Oystacher to not follow through on the orders he entered. While there’s nothing wrong with canceling orders, the definition of spoofing relies on there being no intention of following through on them.
“The exchange spoofing evidence also counters the fiction that Oystacher was an innocent actor, trying his best to comply, who now unwittingly finds himself subject to the arbitrary whims of the commission,” the CFTC said. “Oystacher professes that he had no idea or notice that his trading constituted spoofing, that he is committed to compliance, and that he conducted his trading strategy in good faith. Plainly speaking, these are brazen fabrications.”
Spoofing in U.S. futures markets became illegal in 2010, when the Dodd-Frank Act took effect. The CFTC invoked that rule when it accused Oystacher and 3Red in its 2015 lawsuit of engaging in the practice. Spoofers place orders they don’t intend to fill for the sole purpose of moving prices in a direction favorable to their strategy, then cancel them before they are filled.
As part of its case against Oystacher, the CFTC wants to call as a witness Karsten Hiestermann, according to a court filing. He is the director of the Exchange Supervisory Authority of Hesse, which regulates Eurex, one of Europe’s largest markets.
The government also plans to call as witnesses 3Red Chief Operating Officer Stephen Strohmer, former 3Red software developers, exchange officials and executives from competing trading firms related to “complaints about spoofing and manipulation,” according to a filing.
The CFTC also plans to call Edwin Johnson, who co-founded 3Red with Oystacher. The two men have been involved in a legal battle since 2014 that hinges on how Johnson left the firm a year earlier. Johnson, who owned 10 percent of 3Red, sued the law firm that helped set up 3Red after claiming he was pushed out, and alleged that potential investors were being spooked by fears of spoofing at the firm. He also claimed his law firm had a conflict of interest in simultaneously representing both him and Oystacher, who held 90 percent of 3Red.
Johnson eventually left the firm and entered into a confidentiality agreement with Oystacher and 3Red concerning his allegations over his departure. In a second lawsuit, Oystacher and 3Red sued Johnson for allegedly breaching that confidentiality agreement.
Some of the more explosive details in the 3Red saga emerged in filings made by Johnson. He alleged that top executives at CME and Intercontinental Exchange knew about and condoned Oystacher’s trading practices.
Johnson described meetings he had with FBI agents in 2014 about his former partner’s trading where he told agents that CME Executive Chairman Terry Duffy and David Goone, the chief strategy officer of Intercontinental Exchange, had given him “false assurances” that “Oystacher’s trading practices were legal and legitimate.”
Last month, a CME spokeswoman said Duffy never discussed Oystacher’s trading with Johnson and a representative for Intercontinental Exchange declined to comment.
The cases are Johnson v. Gardiner Koch Weisberg & Wrona, 14-06857, Illinois Circuit Court of Cook County (Chicago), 3Red Group Illinois LLC v. Johnson Edwin, 14-19726 Illinois Circuit Court of Cook County (Chicago) and U.S. Commodity Futures Trading Commission v. Oystacher, 15-cv-09196, U.S. District Court, Northern District of Illinois (Chicago).