CFTC orders Tower Research Capital to pay $67.4m in spoofing case

Maria Nikolova

The proprietary trading firm is accused of engaging in a manipulative and deceptive scheme, spanning nearly two years and involving thousands of occasions of spoofing in equity index futures products.

The United States Commodity Futures Trading Commission (CFTC) today issued an order filing and settling charges against proprietary trading firm Tower Research Capital LLC.

The firm is accused of having engaged in a manipulative and deceptive scheme, spanning nearly two years and involving thousands of occasions of spoofing in equity index futures products traded on the Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT). The order finds that Tower Research Capital, through three of its traders, engaged in this unlawful activity while trading futures contracts through Tower accounts, which benefited Tower financially while causing over $32.5 million in market losses.

Under the order, the firm will have to pay a total of $67.4 million. The sum comprises $32,593,849 in restitution, $10,500,000 in disgorgement, and a $24,400,000 civil monetary penalty. This marks the largest total monetary relief ever ordered in a spoofing case.

The order also requires Tower to cease and desist from violating the Commodity Exchange Act’s prohibition on spoofing and the use of manipulative and deceptive schemes.

The order finds that from at least March 2012 through December 2013, Tower, through the traders, on thousands of occasions, placed orders to buy or sell futures contracts with the intent to cancel those orders prior to execution.

The traders implemented the deceptive scheme by placing one or more orders that they wanted to get filled (genuine orders) on one side of the market, typically consisting of passive orders whose quantities are only partially visible to other market participants; and, on the opposite side of the market, placing one or more orders that the traders intended to cancel before execution (spoof orders), typically consisting of fully-visible passive orders for a larger total quantity. Generally, after receiving a full or partial fill on the genuine orders, the traders then cancelled the spoof orders. In placing the spoof orders, the traders often used an order splitter to enter several smaller, randomly-sized orders in an attempt to obscure their scheme from other market participants.

The traders induced other market participants to trade against their genuine orders by intentionally sending a false signal to the market that they wanted to buy or sell the number of contracts specified in the spoof orders and creating a false impression of supply or demand. As a result, the genuine orders would fill sooner, at better prices, or in larger quantities than they otherwise would.

Today, in a separate action, the Fraud Section of the Department of Justice announced entry of a Deferred Prosecution Agreement with Tower in a parallel matter, deferring criminal prosecution of Tower on a commodities fraud charge.

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