DRW Judge Presses Trader for More Than ‘Vague’ Recollection

  • Sullivan asks Wilson to refute allegations of manipulation
  • CFTC is seeking fine, lifetime ban for swaps futures trading

On his second day on the witness stand, DRW Holdings Inc. founder Donald R. Wilson was grilled by a federal judge wanting to know why the veteran trader believed he wasn’t manipulating interest-rate derivatives prices by submitting inflated bids.

Wilson is accused by the U.S. Commodity Futures Trading Commission of rigging prices to juice profits. U.S. District Judge Richard Sullivan, who is presiding over the civil case in Manhattan, appeared unimpressed by Wilson’s answers.

"You can’t seem to tell me, other than a vague sense of your recollection, that you had more confidence in your model," Sullivan told Wilson Friday.

Sullivan will decide the outcome of the non-jury trial on CFTC allegations against Wilson and his trading firm, Chicago-based DRW, of submitting inflated market bids in 2011 to drive up settlement prices for derivatives contracts offered by Nasdaq Inc. The agency claims DRW made $13 million in excess profit on a $350 million existing position.

Market Positions

Wilson was asked to explain why Chicago-based DRW dramatically increased its bidding prices in August of that year, just as the those on the other side of trades -- investment bank Jefferies LLC and now-defunct brokerage MF Global Holdings LLC -- were asking to close out the positions. Wilson told Sullivan that the firm grew convinced the contracts were worth more, but struggled to explain why.

"I became more confident in our valuation," Wilson said. "We continued to work on the model. The inputs may well have changed."

The questioning went to a key point in the case: to prove manipulation, the government has to show that the bids being submitted had no relationship to real-world supply and demand. Wilson and DRW have maintained that their bids were based on an honest evaluation of the market.

The future of DRW may be riding on the outcome as the CFTC is seeking a lifetime trading ban for Wilson and his firm. The trial is scheduled to resume Monday.

Manipulation or Brilliant Trade? The Curious Case of Don Wilson

According to the CFTC, DRW submitted inflated bids more than 1,000 times from January to August of 2011, during the 15-minute end-of-day period when settlement prices are calculated -- a tactic known as “banging the close.” The bids were active for just minutes at a time and never once resulted in a completed trade, though they were factored into the exchange’s settlement calculations.

DRW’s open positions with MF Global and Jefferies involved seven different contracts, concentrated in the 10-year and 30-year maturities, Wilson testified.

DRW and Wilson argued in pre-trial filings that the contracts failed to account for a phenomenon known as convexity bias, in which prices for interest-rate futures should differ by a certain amount from interest-rate swaps. DRW and Wilson said they believed prices on the contracts would rise as traders recognized the flaw and corrected their pricing.

Wilson acknowledged under questioning from Sullivan that he knew Nasdaq wasn’t taking any other bids into account for its settlement pricing and that the bids were helping DRW’s position. He also confirmed that the firm stopped placing bids once it closed out its existing positions and collected the profit, but said they did so because they no longer believed they could attract other traders into the market.

Still, he maintained DRW’s bids were rooted in a genuine desire to find investors who would take the other side of the trades.

"As long as our bids were a true indication of where we wanted to transact, that activity was totally legitimate," Wilson testified.

The case is CFTC v. Wilson, 13-cv-07884, U.S. District Court, Southern District of New York (Manhattan).

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