In a significant move underscoring its commitment to fight market manipulation, the Commodity Futures Trading Commission (CFTC) imposed a fine of $45m on a top-tier bank in May 2023. Eventus, a multi-asset class trade surveillance, algo monitoring and risk controls solutions provider, has explored what firms can do to avoid a similar incident.
The fine came as a result of the bank’s involvement in deceptive trading practices, including spoofing, in the US dollar swaps market, as well as communication recordkeeping failures on mobile devices. This precedent-setting enforcement action demonstrates the CFTC’s consistent focus on mitigating known patterns of market manipulation, as it applies longstanding spoofing rules to voice-brokered markets and against registered swap dealers.
Eventus explained that the enforcement order issued by the CFTC outlines that over several months, a trader presented bids or offers to a Swap Execution Facility (SEF) with the intention to withdraw these orders prior to execution. This action was intended to control the prices displayed on broker pricing screens, thereby inhibiting any price movement in an undesirable direction. Despite this, the order notes, no surveillance system managed to flag either the market activity or the associated communications. In the wake of the enforcement action, CFTC Commissioner Kristin Johnson observed that the firm “failed to establish policies and procedures to prevent or detect this sort of misconduct.”
In response to the fine, the firm was obligated to initiate a series of remedial measures as part of its collaboration with the CFTC. These encompassed the introduction of strengthened policies on order handling, pre-hedging, and spoofing, as well as the enhancement of internal escalation procedures and employee training. Of note, the firm was required to bolster its trade surveillance tools to better identify trading behaviour of concern, such as spoofing.
One of the most frequently used alerts on Eventus’ Validus Trade Surveillance platform is the Validus spoofing detection alert, which is adjustable to identify potential issues in the swaps market. The system can pinpoint spoofing and layering activities over any time duration and can adapt to a range of parameters specific to the firm, including manually or automatically submitted orders.
To efficiently process a higher volume of alerts, Validus utilises Robotic Process Automation (RPA) and a machine learning model to assign a probability score, ensuring only the most high-risk alerts are presented to the firm’s trade surveillance analysts while retaining an audit record of all others. The Validus Market Visualiser also assists compliance teams in more rapidly identifying manipulative trading patterns, such as spoofing and layering.
Eventus, the leading global provider of multi-asset class trade surveillance, algo monitoring and risk controls solutions, offers the award-winning Validus platform. The platform’s proven performance in the most demanding, high-volume, real-time environments of tier-1 banks, broker-dealers, futures commission merchants (FCMs), proprietary trading groups, market centres, buy-side institutions, energy and commodity trading firms, and regulators, sets it apart. Eventus’ fast-growing client base counts on Validus and its responsive support and product development teams to address its most urgent regulatory challenges.
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