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Two European bankers (Person A and Person B) were found guilty of manipulating the price of precious metals during their employment with an EU-based bank. The two traders were found to have ‘spoofed’ orders in a non-European country, encouraging others to make trades they might not otherwise have made. They received prison sentences of more than a year each.
The bank was forced to pay a civil monetary penalty of around €28 million but did not admit or deny the allegations.
This anonymised case study shows the importance of having strict anti-market manipulation procedures in place to ensure the integrity of the markets.
What is spoofing?
Spoofing is the act of making decoy orders to give the impression of increased or decreased demand for a commodity. This encourages other traders to invest or divest and moves the price of the commodity accordingly. However, the spoofer then cancels the order without making the trade, having ensured the price has increased or decreased, whichever gains them the greatest benefit.
The background
Over a period of around five years from the late 2000s, Person A and Person B were working for the bank and, on multiple occasions, placed orders on precious metals futures. They also placed orders on the other side of the market without the intention to follow through and complete the trades, thus shifting the price in favour of their genuine transactions.
The men claimed that, although this activity was prohibited, they did so in the presence of the bank’s compliance team. Person A claimed in court that no one in compliance had mentioned there might be a problem with spoofing. However, the judge rejected this defence, stating that the defendants knew the rules and understood that this form of market manipulation would give a false impression of the value of commodities to other market participants.
As a result of their actions, for which they were convicted in court, they were sentenced to a year in prison, with six-figure sanctions, and banned from trading for five years.
What companies can learn
Person A was arrested, tried and convicted for his role in the transaction. He was sent to prison for 24 months as a result of his actions.
Whether or not the bank knew about the activity of the traders, there was clearly a failure of internal systems that allowed the crime to take place in this case study. To prevent this, there should be a robust trade surveillance procedure to ensure that employees do not create a situation in which a financial institution is committing an offence under the Market Abuse Regulation.
Employees can also take advantage of spoofing in their personal trading. This can cause a conflict of interest with the bank or investment firm, or its clients, leaving the individual and the company open to sanctions related to the Markets in Financial Instruments Directive (MiFID II).
Ensure you run pre-clearance on employee personal trades and monitor them for infringements of the directive to help maintain compliance.
TradeLog provides a streamlined personal trade pre-clearance experience to lighten the load on compliance teams, as well as providing alerts of violations. Request a demo for your company today.
