To Catch A Spoofer
3Red Trading, the Chicago-based proprietary trading firm, is once again in trouble for spoofing. You may recall that they were fined $150,000 last November by the CME and $125,000 this past June by the Intercontinental Exchange for spoofing. This time, the CFTC is charging 3Red Trading and its owner Igor Oystacher with “spoofing and employment of a manipulative and deceptive device while trading futures on four different futures exchange”. The complaint charges that 3Red spoofed in copper, crude oil, natural gas, VIX and the E-mini contracts on multiple dates. According to the CFTC:
“3 Red employed or attempted to use or employ a manipulative or deceptive device, scheme, or artifice to defraud, by placing passive orders for a large number of contracts on one side of the market to create the false impression of increased market depth and book pressure in order to fraudulently and manipulatively induce other market participants to place orders for contracts at price levels that they would not have placed but for the spoof orders. Oystacher and 3 Red then misused the avoid orders that cross functionality to virtually simultaneously cancel their spoof orders and flip to aggressively take the other side of the market (and trade with market participants induced to place orders similar to the spoof orders before other market participants became aware that they were spoof orders).”
The CFTC is saying that the spoofing that 3Red was doing resulted in extra book pressure which caused anticipatory high speed algorithms to run ahead of the spoofers. Immediately after the spoofing orders were placed, 3Red would place orders on the other side of the book to pick off the anticipatory algorithms that were running ahead of their fake orders. Some might say that this amounts to some sort of vigilante justice against the high speed algos which look to run ahead of legitimate order flow. But two wrongs don’t make a right and spoofers like 3Red must be held accountable for their actions. Here are some of the specifics according to the CFTC:
- Defendants’ spoof orders created a strong (but false) signal regarding interest on one side of the market. These large spoof orders deceptively encouraged other market participants (and their algos programmed to react to changes in book pressure) to enter orders on the same side of the market as the spoof orders.
- Oystacher and 3 Red knew or recklessly disregarded the fact that the spoof orders would create the false appearance of market depth and book pressure and result in misinformation triggering other market participants’ trading activity.
- Oystacher and 3 Red placed the spoof orders in a manner to avoid being filled by placing them as passive orders at or near the best bid or ask price level, behind existing orders, and canceling them less than a second after they were placed.
- Oystacher and 3 Red further minimized the probability that the spoof orders identified in Exhibit A would be filled by canceling them less than one second after placing them. Indeed, in some of the markets, the average duration of the spoof events for the spoof orders identified in Exhibit A was significantly less than one second, as shown below.
- Defendants’ cancellation of the spoof orders and “flip” to the other side happened almost simultaneously, taking place in less than or equal to 5 milliseconds (i.e., thousandths of a second).
The CFTC details 3Red’s spoofing activities for “at least 51 trading days” between December 2011 and January 2014 but does not state that these were the only days that 3Red spoofed. The number of instances could be much larger and it’s possible that the CFTC did not want to detail every occasion.
Bloomberg ran an excellent piece this morning which details the numerous problems that Mr. Oystacher has had in the past with authorities and his competitors. The man is a serial spoofer and for some reason is still allowed to wreak havoc on markets.
This case makes us wonder how many other firms which portray themselves as “liquidity providers” are out there spoofing and how often is this occurring. We’re glad to see the CFTC is finally using their recently acquired Dodd-Frank powers more and hope that they continue to catch and prosecute more crooks like 3Red.