CFTC insists ex-UBS trader knowingly engaged in “spoofing”

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Less than a month after ex-UBS precious metals trader Andre Flotron filed a motion to dismiss the “spoofing” case against him, the Commodity Futures Trading Commission (CFTC) has sought to nix his objections.

On Friday, July 13, 2018, the CFTC submitted its response to Flotron’s objections at the Connecticut District Court.

Let’s recall that the CFTC alleges that Andre Flotron engaged in a five-year manipulative and deceptive scheme to trick other traders in the precious metals futures market. The regulator says that he placed large bids and offers with the intent to cancel them before execution. Under the allegations, he intended for these “spoof” orders to induce other market participants to transact on smaller, “genuine” orders that he placed on the opposite side of the market.

The complaint describes a particular pattern in which Flotron repeatedly placed large orders in same-digit amounts (e.g., 33 lots, 55 lots, 111 lots) opposite small orders in single-digit amounts (e.g., 1 lot, 5 lots, 7 lots). While the small orders were usually placed at the best bid or best offer, he placed the large orders away from the best bid or offer, where they were less likely to be filled. After the small orders were filled, he cancelled the large order. The CFTC Complaint details nine specific examples that are illustrative of the pattern described above.

The CFTC alleges that Flotron traded in this manner from at least 2008 through 2013.

In addition, the CFTC says that in 2008, Flotron taught a subordinate to place orders in a similar pattern and, in doing so, he revealed his motive and intent to trick other market participants.

The CFTC accuses the defendant of violations of the anti-spoofing provision of the Commodity Exchange Act (Count I), and of violations of the Act’s and Commission Regulations’ prohibition on manipulative and deceptive devices (Count II).

In his motion filed last month, Flotron argued that Counts I and II do not meet the necessary pleading requirements because the CFTC Complaint uses words and phrases like “usually,” “typically,” and “at times.” But the CFTC now argues that Flotron turned a blind eye on the trading pattern identified in the Complaint and the nine examples of spoofing mentioned there. This pattern, along with other evidence, provide ample basis for the claim that Flotron engaged in a manipulative and deceptive spoofing scheme, the regulator argues.

Regarding the allegations concerning Flotron’s intention to violate the regulations, the CFTC notes that he taught a subordinate to place large orders for the purpose of tricking other market participants. This allegation alone is sufficient to allege fraudulent intent, according to the regulator.

Furthermore, the CFTC Complaint details numerous examples of Flotron placing large, same-digit orders opposite smaller ones and cancelling these large orders after the smaller ones were filled. In some of the examples, he cancelled the large order even as the market was moving toward it, increasing the likelihood of it getting filled. According to the regulator, if the defendant actually wanted these large orders to be filled, he would not have engaged in a pattern of canceling them after his small orders on the other side were executed. And surely he would have left them pending as the market approached.

Also, Flotron’s same-digit orders were extremely large compared to other orders in the order book. These spoof orders often increased the total visible volume bid or offered by over 45%. The spoof orders were also sometimes many times larger than the total volume at any other visible price level. If Flotron had actually wanted to execute such a large volume, he likely would only have shown small pieces of it to the market at a time, the CFTC argues.

Finally, the CFTC addresses Flotron’s arguments about the scope and meaning of the “anti-spoofing” provision being unclear. The US regulator says that the plain language of Section 4c(a)(5) explicitly spells out what conduct constitutes spoofing, thus providing fair and clear notice to the defendant that his deceptive trading strategies are illegal. Simply put, it is not unconstitutionally vague to prohibit traders from placing orders that they intend to cancel, which is exactly what the plain language of the statute prohibits.

The case is captioned Commodity Futures Trading Commission v. Flotron (3:18-cv-00158).

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