DRW’s Wilson Takes the Witness Stand With Career on the Lineby
CFTC accuses him of manipulating interest-rate benchmark
‘This is not a nefarious thing,’ Wilson tells federal judge
Veteran derivatives trader Donald R. Wilson placed one of the biggest bets of his career Thursday: seeking to convince a judge that his firm did not manipulate interest rate markets in 2011.
Wilson and his Chicago-based firm, DRW Holdings Inc., are locked in a high-stakes trial over U.S. regulators’ allegations that they nudged up an interest-rate benchmark to juice profits on a $350 million position. If the government prevails, Wilson and DRW could be subject to the market equivalent of the death penalty: a lifetime ban on trading in derivatives markets, the lifeblood of the 700-employee firm.
"There was nothing I viewed at all manipulative of what we were doing," Wilson told U.S. District Judge Richard Sullivan, who is deciding the lawsuit in Manhattan without a jury.
The U.S. Commodity Futures Trading Commission accuses Wilson and DRW of using a manipulative trading tactic known as "banging the close" to skew prices for a then-new interest-rate swap futures contract on the Nasdaq Inc. exchange. The agency says DRW submitted artificially inflated bids more than 1,000 times over a seven-month period during the 15-minute period prior to the close of trading when settlement prices are calculated.
The bids, which were left on the market for only minutes at a time, never resulted in a completed trade but were factored into settlement prices for the contract. The strategy drove the benchmark higher, resulting in $13 million in illicit gains on its preexisting position, according to the CFTC. The moves drew scrutiny from Nasdaq and outrage from DRW’s counterparties -- including investment bank Jefferies LLC and now-defunct brokerage MF Global Holdings Ltd. -- which lost money as a result and accused DRW of manipulating the market.
The contract allowed buyers to receive a fixed interest-rate payment while paying an adjustable floating rate to the seller. A trade would be profitable for a buyer if the fixed rate stayed predominantly higher than the floating rate. DRW’s position, comprising thousands of contracts and maturities, was exclusively on the fixed side of the market.
The trial got under way Thursday, and Wilson, who rose from Chicago’s trading pits to run one of the largest derivatives firms in the world, was the fourth witness to take the stand. Under questioning by a CFTC lawyer, he acknowledged that the firm’s bids influenced price calculations but said there was no intent to manipulate and that the bids were legitimate efforts to attract counterparties at a price where it believed the market should trade.
Wilson said exchange officials had asked his firm to bid actively during the settlement window to attract other market participants, and that the firm’s pricing was rooted in a belief that the market should be higher. He said he hoped the bids would correct flaws in the market.
CFTC lawyer Daniel Ullman confronted Wilson with e-mails and other evidence suggesting the company was engaged in prohibited tactics.
E-mails from an analyst to Wilson and others at DRW made repeated references to successful efforts to "move the curve" and settlement prices in a way that favored their estimation of where the market should trade, and that prices were now "DRW defined" rather than a basic reflection of existing rates. Ullman asked whether this contravened company policy prohibiting attempts at "moving the close" in a market.
"This is just a quant looking at how the exchange is settling things and noting our bids are being taken into account," Wilson testified. "This is not a nefarious thing."
MF Global accused DRW of manipulating the market after the brokerage backed out of a trade in February 2011, saying DRW’s bids were skewing the market and hurting other participants. Wilson dismissed the firm’s reaction, saying: "People accuse people in markets of manipulating things all the time. I’m sure we’ve been accused of it before. Everybody accuses everybody."
Of MF Global, which went bankrupt in 2011, he later added: "Their whole behavior to me was just insane."
Wilson’s testimony is expected to resume Friday.
The trial, which is expected to last a week, is a rare test of the CFTC’s ability to prove a manipulation claim. The agency hasn’t tried such a lawsuit since 2005. The agency won that case before a jury, only to see the judge overturn the verdict.
The case is CFTC v. Wilson, 13-cv-07884, U.S. District Court, Southern District of New York (Manhattan).