CFTC Orders JPMorgan to Pay Record $920M for Spoofing and Manipulation (2020)

“This action sends the important message that if you engage in manipulative and deceptive trade practices you will be caught, punished, and forced to give up your ill-gotten gains,” added Division of Enforcement Director James McDonald.<p>No, Mr McDonald, it&#x27;s quite the opposite. The important message is that if your organization can keep the profits from criminal activities higher than the penalties, they can perpetuate it. That&#x27;s because there are virtually no other consequences for any individual criminals personally responsible for this, and none of them was persecuted, punished and forced to give up his ill-gotten gains.

As a trader, that does look really bad. These people know that the market looks at the orders to guess the state of supply and demand. The penalty looks big but it&#x27;s over an 8 year period.<p>It&#x27;s not exactly a secret that some market participants work out some kind of imbalance measure, and of you&#x27;ve ever implemented a system like that, like I&#x27;ve done, it will have crossed your mind that you could shove a load of orders in that mask the imbalance for everyone else. But you have heard of the spoofing rules and you don&#x27;t do it. If we want a functioning market without a reputation for sharks, there&#x27;s some rules to be followed.<p>Iirc they got a guy thrown in jail for this? Sarao or something like that? He had someone build him a spoofing machine and made a lot of money, though it&#x27;s not clear to me how much was from doing this specifically.<p>In case you&#x27;re wondering about that intention to cancel phrase, of course there are participants like market makers who do cancel a lot of orders. In that case it&#x27;s a matter of them following the market in providing liquidity, they are not doing it to fool everyone.

I was a CFTC consultant for a time analysing suspect code subpoenaed in an investigation. I can say that the parameters for analysis were very strict and required explicit proof of spoofing by the app involved. The people I was involved with were definitely not ghost hunters. They took their role very seriously and were not looking to bust someone who wasn&#x27;t being intentionally manipulative.<p>I&#x27;m sure there are other anecdotes, but it left me feeling like at least this government org was doing what it was supposed to.

I think one of the things people ought to remember with these cases is that this is probably really bad for JPM - over the years this took place the traders will have been taking a huge portion of these profits as bonuses getting incredibly wealthy. Then the CFTC comes along and goes &quot;This is illegal, we&#x27;re taking all the profits you made from this trading + $500m in fines&quot; at which point JPM has already paid out most of the profits to the traders, so not only do they have a massive fine, lose most of the profit from their trading on those desks for best part of a decade, they&#x27;ve already paid the traders a shit tonne for the liability they incurred. I had a look at their accounts but it&#x27;s very difficult to tell how much JPM really made on these trading desks over that time (even ballpark) but it may well be that this fine means that JPM would essentially have been better not being in this business at all.

For the uninitiated, &quot;spoofing&quot; does NOT mean what you think it might, e.g. spoofing network packets or making fake trade records.<p>&quot;Spoofing&quot; simply means placing orders on the exchange orderbook which one supposedly does not intend to execute.<p>I&#x27;ve never understood this, because any bid&#x2F;ask order on the orderbook CAN be executed against, until it is canceled. If they were &quot;flashing&quot; large bids&#x2F;asks that were being immediately canceled to trick other algos into lifting, that is annoying but it&#x27;s the algos that fall for the spoof that are stupid. The algos should just hit the large spoof bid and the spoofer will be left holding the bag.

Why do CFTC try to police this? For the money or optics?<p>Orders far from the BBO are clearly irrelevant and those close to the BBO are not &quot;free&quot; for the spoofer given they have to bear the risk that the orders could be filled if the market moves.<p>Effectively it means anyone cancelling an order has to worry that their action could be interpreted as &quot;spoofing&quot; - which will make market making more risky and expensive.<p>The only ones this type of enforcement &quot;protects&quot; are are those who naively think they&#x27;ve discovered a strong trading signal based on order volumes away from the BBO. Putting a $1 bid on a Rolex on ebay which is currently attracting $10k bids isn&#x27;t going to fool anyone into thinking that demand is increasing and is relatively harmless.<p>For me real manipulation involves actual trades, not cancelled&#x2F;unexecuted orders, and should be policed stringently. E.g. banging the market at close in order to nudge the closing price in order to boost the value of a position in a different book.

Across 8 years, what was the profit on this illegal activity? In any other branch of law there is a concept of the sentence providing a deterrent, or at least removing from the actor from the opportunity to repeat offend.<p>Can someone knowledgeable help me understand why these concepts seem missing from financial market penalties like this? The same people still have their license, and probably didn&#x27;t even suffer a loss on the activity.

I wish the press release indicated how much JPMS gained, so I could know if JPMS is still significantly ahead after these penalties.<p>Does the deferred criminal prosecution mean, basically, pay your fine and don&#x27;t do it again and you won&#x27;t be prosecuted? So they really face no long term negatives if they gained more by knowingly breaking the law and paying a fine later?

Should they have not been suspended from trading for a certain period of time in addition to the fine? Take for eg, sports as an analogy - Individual players, no matter who popular they are, are almost always suspended&#x2F;banned if found cheating.<p>Capital gains over last few years have been insane. The fine might be higher but a 400MM profit 5 years ago would have easily doubled just investing in SP500.

Unpopular opinion here: these rules are stupid. It’s like fining or jailing someone for bluffing in poker. Of <i>course</i> people are spoofing or doing other manipulative activity.<p>Similar things happen in retail all the time with no jail sentences, it’s just not algorithmic. “40% off but the offer ends in 3 hours!” is designed to mislead you into thinking there is a short-term mispricing of the product in a very similar way.<p>Or the real estate market, where basically every single price you see is a lie.<p>Or the used car market - it’s $15k, but when you go to pay you find out it’s $5k more to actually get the wheels or something.<p>If only any of these other markets were HALF as clean and transparent as the lit public order books (even if they were unregulated!) they would be massively better than they are now.

Just remember all this? It&#x27;s completely legal in the crypto markets. It&#x27;s bad here, and its so much worse there.

Could someone add 2020 to the title?

I bet even with $920M fine they&#x27;re still profitable

September 29, 2020?

since there is optionality in the order book perhaps a way to combat this would be to charge a proportionally higher fee for orders farther out of the money? like a real options book.

This took place over a year ago - why is it being posted now?

Why did it start in 2008 and end in 2016. What happened there?

They should be barred from participating in the activity.

I wonder how they spoofed market trades though. It&#x27;s possible to do it with crypto before the transaction is able to be verified. Alas, JPMorgan Chase will just eat the cost and continue to do sketchy stuff. All the most banks do similar sketchy stuff. That&#x27;s why credit unions (CU) were made and why I bank with a CU.