Market cops step up their fight against identity theft

Criminal charges unveiled this week against a former JPMorgan Chase metals trader have indicated that authorities are catching up with the problem of identity theft, a form of violence that has accelerated alongside hyperfast markets. .

John Edmonds pleaded guilty to conspiracy to commodities fraud and identity theft on gold, silver, platinum and palladium futures contracts, announced the US Department of Justice. His case reflects an enlargement campaign aimed at eradicating the practice of fooling other traders by passing and quickly canceling orders.

Spoofing is a manifestation of electronic markets. Bad behavior that could have punched a trader on a trading floor a few years ago can now be stealthily executed by an algorithm.

But this activity also leaves digital traces. After a slow start, the market cops learned to follow them.

Mr. Edmonds was the 10th accused charged with criminal spoofing in 2018, the Department of Justice said, a significant increase. Prosecutors filed criminal prosecution charges against only two defendants last year and before, in 2014 and 2015.

The Commodity Futures Trading Commission, the leading derivatives regulator in the United States, has, during its last fiscal year, initiated 26 enforcement actions related to manipulative, deceptive or falsely reported transactions, the majority of which case of identity theft. The sum was more than triple the average number of shares over the previous four years.

The CME Group, the world's largest futures exchange operator, has this year committed more than 50 disciplinary actions under Rule 575, which prohibits spoofing and related offenses, according to a Financial Times analysis of exchange notifications. . This compares with 42 in 2017 and nine in 2016.

Outside the United States, Japanese financial regulators fined a broker a fine of 218.37 million yen ($ 1.9 million) in 2017 for having parodied the bond futures market. ;State.

The cases have drawn authors ranging from day laborers working from home to some of the largest institutions on Wall Street. In January, Deutsche Bank agreed to pay $ 30 million to settle the CFTC's spoofing charges in the precious metals markets – the biggest fine ever imposed by the agency.

The 2010 Dodd-Frank Financial Reform has explicitly outlawed the identity theft, defining it as "an offer or an offer with the intention of canceling the offer or the l & # 39; 39, offer before the run. The CFTC issued official guidance on this in 2013. Rule 575 was expressly prohibited by CME the following year, although the offenses were previously prosecuted under a different rule.

The growing number of cases partly reflects the efforts of surveillance agencies to improve their surveillance technology. CME's automated systems can now detect spoofing faster than before, said the stockbroker. In February, CME began sending detailed order data to the CFTC on a daily basis.

"We worked with the Department of Justice and engaged in exchanges to make sure we discovered this conduct as much as possible," said James McDonald, Director of Law Enforcement at CFTC. The actions of the agency, "we hope, will ultimately have a deterrent effect in the long run".

Mr. McDonald said that the existence of the identity theft was causing others to withdraw from a market, harming liquidity. "We talked to market leaders who disabled their algorithms or who pulled out of the market after seeing a disruption in business models," he said.

Identity theft charges are much easier to prove for the government than a more sophisticated manipulation case

Concerns about price-fixing have long persisted in the precious metals markets, with small investors in gold and silver expressing the most vocal complaints. However, in 2013, the CFTC closed a lengthy investigation into the misconduct of money futures, announcing that "there is no viable basis for taking action on the money. # 39; execution ".

Classic cases of market manipulation require proof that a trader has caused an "artificial price". This has always been a high bar to cross.

The law on the theft of identity is simpler, according to Aitan Goelman, director of law enforcement at the CFTC until last year. It is sufficient for the agency to show a person intended to cancel an offer before its execution.

"The anti-spoofing statue is really useful because as long as you can prove the intention at that time, you do not have to go further" in terms of motivation, said Mr. Goelman, now a partner of Zuckerman Spaeder . "I think that's why he's becoming more and more popular."

Or, as Paul Pantano, partner at Willkie Farr & Gallagher, said: "The identity theft charges are much easier to prove to the government than a more sophisticated handling case."

A Chicago jury pronounced the first criminal conviction for impersonation in 2015. The defendant, Michael Coscia, lost his appeals and was sentenced to three years imprisonment for falsifying the markets gold, soybean oil and currency. He had already been tried for civil charges for identity theft.

Prosecutors have now turned to vendors accused of spoofing. In January, they unveiled the criminal lawsuit against Chicago tech consultant Jitesh Thakkar for designing a computer program that would have helped British businessman Navinder Singh Sarao to usurp the S & P 500 e-mini futures contract.

"In this case, the government is extending the law on" spoofing "recently promulgated much further than it has ever done before, accusing the owner of a small software company. "aided" and "conspiring" with a trader who was using software created by the company to negotiate on the financial markets, "Mr. Thakkar's attorney, Renato Mariotti, testified in court.

In the performance of his duties as federal prosecutor, Mr. Mariotti was convicted of an unprecedented sentence against Mr. Coscia.

Authorities may have more cases going. Mr. Edmonds' indictment, whose attorney did not respond to a request for comment, indicated that he had learned of his misleading strategy from experienced traders at his bank and that "He had personally deployed it hundreds of times with the knowledge and consent of his immediate supervisors." JPMorgan declined to comment.