Bloomberg is reporting that the CFTC has asked the court presiding in its civil action against Igor Oystacher to permit them to add evidence of additional alleged spoofing occurring last week in 10-year T-note futures. The CFTC’s court filing provides the following detail:
The Surveyor team looked for 111-contract orders in ZN on February 2, and found numerous sequences that fit the above description. Once such sequence is shown here:
Assuming all 111-contract orders are Igor’s, we see him gradually adding eleven 111-contract offers (1,221 contracts) to what was already the best offer at the top of the book. He leaves those orders active for 10 seconds, then cancels eight of them, leaving 807 contracts still quoted. He then waits an additional whole second, after which someone (let’s assume it is still Igor) places and is immediately filled for a buy order of 839 contracts.
Is this spoofing? Maybe, but this example is far from conclusive.
To prove a spoofing case, the CFTC must show that Igor entered these offers with the intent to mislead other traders as to the true level of supply in the market. If Igor was spoofing, his “fake” offers showing increased selling interest would convince other traders to lower their prices, enabling him to buy at lower prices than he would have obtained without his fake offers.
Accused spoofers typically deny such intent, arguing that active traders are allowed to switch sides based on new signals in the market, and that patterns like the above are simply the result of a legitimate change in outlook.
How can a court decide whether a trader who switches from aggressively selling to aggressively buying is spoofing or just legitimately changing his outlook?
In most spoofing cases, the second-side order is entered while the allegedly “fake” first-side orders are still active. This was the case in the Michael Coscia and Aleksandr Milrud criminal actions, and is alleged to be the case in the pending Nav Sarao case. In all of those cases, (1) the spoofer entered large fake orders, (2) market prices moved away from those fake orders to price levels they were not at in the absence of the fake orders, (3) the spoofer obtained a favorable fill on the opposite side at those new price levels, (4) the spoofer then cancelled his fake orders, and (5) market prices returned to prior levels once the fake orders were cancelled.
When this sequence is present, it is reasonable to infer that the reason the spoofer entered the large fake orders was to drive the market toward his waiting (usually smaller) opposite side order. There is no legitimate trading strategy that is similar enough to offer a credible alternative explanation.
But several of these elements are missing in the Igor pattern above. The price does not move in response to Igor’s orders, he cancels most of his allegedly fake orders before entering his opposite side order, and the opposite side fill he obtains is at the same price that was already top of book before the sequence began.
Perhaps a more thorough review of more of Igor’s order sequences would convince me otherwise, but at first blush, this sequence looks close enough to a trader legitimately changing his outlook and switching sides to not give rise, in my mind, to an inference of manipulative intent. I look forward to the public release of more of Igor’s trade sequences to continue this discussion.
-MJF