Exchanges Clash With Regulators Over Market-Manipulation Case
21 January 2016 - 8:51AM
Dow Jones News
By Bradley Hope
In a rare confrontation, the two biggest futures exchanges are
clashing with the industry regulator over its pursuit of a Chicago
trading firm for market manipulation.
Last week, CME Group Inc. in Chicago and Intercontinental
Exchange Inc. in Atlanta, together with representatives of the
futures trading industry, jointly filed a friend-of-the-court brief
opposing the Commodity Futures Trading Commission's definition of
"manipulation" being used in a 2013 case against DRW Investments
LLC and its founder, Don Wilson Jr.
The exchanges argue that the CFTC is trying to establish a lower
burden of proof for market manipulation in the case, which could
open up legal trading to potential enforcement actions. Exchanges
typically don't oppose the CFTC in enforcement cases.
On Tuesday, lawyers for the CFTC filed a motion opposing the
inclusion of the brief in the case because it was filed late and by
entities that weren't friends of the court, but "friends of the
litigant."
The argument goes to the heart of whether firms have the right
to trade if they know their buying or selling will affect the price
of a futures contract.
It also raises the stakes in an increasingly public showdown
between the CFTC and Mr. Wilson, a usually low-profile but
influential trader who is fighting the regulator's charges against
him and his firm.
DRW is one of the biggest proprietary trading firms in Chicago.
The 700-person firm uses quantitative analysis to trade on more
than three dozen exchanges around the world. About a quarter of its
business involves high-frequency trading that relies on high-speed
telecommunications networks and automated computer systems.
The allegations of manipulation center on DRW's trading in an
obscure corner of the futures market over 118 days in 2010 and
2011. The CFTC says DRW sought to manipulate the price of
interest-rate swaps traded on Nasdaq Inc.'s exchange to help make a
profit on an earlier $350 million bet on the direction interest
rates would move. Interest-rate swaps let firms protect or bet
against future swings in rates.
The trades helped Mr. Wilson earn $20 million in illegal
profits, according to the CFTC.
"Traders cannot engage in manipulative acts to affect the price
of futures contracts to achieve their desired profits, regardless
of the so-called motive," the CFTC's acting head of enforcement,
Gretchen Lowe, said in a statement at the time.
DRW's lawyers have argued the trades weren't manipulative
because they were adequately exposed for other market participants
to trade against. They have also pointed to a Sept. 2011 review by
the National Futures Association of DRW's trading over the same
period, which concluded that the manner of the trading reduced the
likelihood it manipulated prices. The NFA is a self-regulatory
agency that polices the futures industry. It declined to
comment.
In the friend-of-the-court brief submitted Jan. 12 the exchanges
and futures trading representatives argued that the CFTC's case
relied on a new, broader definition of manipulation that would
"upset settled trading expectations and practices, and risk
compromising the many public interests that derivatives markets
serve--including price discovery, liquidity and hedging."
The brief was submitted by a lawyer at Skadden, Arps, Slate,
Meagher & Flom LLP, a firm where David Meister, a former CFTC
head of enforcement at the time of the case against DRW, is
employed. A spokeswoman for the firm said Mr. Meister was "walled
off from the matter."
The CFTC said in its motion on Tuesday that because Mr. Wilson
was a member of the CME and a former board member of the Futures
Industry Association, those entities were only attempting to
"parrot" the defendant's arguments. All substantial traders on the
CME are members.
From the outset of the case, Mr. Wilson has dug in for a fight.
When the CFTC informed him in 2013 that it planned to bring
charges, he filed a lawsuit to try to stop them. The effort
failed.
Last year, he hired former White House Special Counsel Lanny
Davis to plead his case with lawmakers in Washington.
Spokeswomen for the CME and ICE declined to comment. A spokesman
for the CFTC declined to comment. Mr. Wilson declined to
comment.
Write to Bradley Hope at bradley.hope@wsj.com
(END) Dow Jones Newswires
January 20, 2016 16:36 ET (21:36 GMT)
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