Law360 reported that Michigan resident, Charles Herbert Proctor III, and Arizona's Synova Asset Management LLC filed a class action lawsuit against JP Morgan Chase, one of the largest banks in the world, for spoofing the U.S. Treasury futures market. This caused them and other class members to unfairly suffer financial losses. It also prohibited participants from market integrity, where price discovery goes unimpaired, trading practices are honest, and high standards of corporate governance are met.
According to Google, "spoofing is an illegal form of market manipulation in which a trader places a large order to buy or sell a financial asset, such as a stock, bond or futures contract, with no intention of executing. By doing so, the trader—or the spoofer—creates an artificial impression of high demand for the asset." This scheme creates real change in the market price at which a Treasury future is bought or sold.
Unfortunately, this claim against JP Morgan for fraudulent trading practices isn't the first of its kind. Deep in the notes section of its 2019 annual financial report to the Security and Exchange Commission (SEC), the bank gingerly addressed the most recent Justice Department probe of its questionable business conducts. "Various authorities, including the Department of Justice’s Criminal Division, are conducting investigations relating to trading practices in the metals markets and related conduct. The Firm also is responding to related requests concerning similar trading-practices issues in markets for other financial instruments, such as U.S. Treasuries. Several putative class action complaints have been filed...against the Firm and certain former employees, alleging a precious metals futures and options price manipulation scheme in violation of the Commodity Exchange Act. Some of the complaints also allege unjust enrichment and deceptive acts or practices under the General Business Law of the State of New York. The Firm is also a defendant in a consolidated action filed in the United States District Court for the Southern District of New York alleging monopolization of silver futures in violation of the Sherman Act." Although not indicted as a whole company, four employees have been charged in an eight-year plot and several traders received sanctions and civil fines according to a Law360 article in early February.
Some wonder why JPMorgan would have presumably found it relatively easy to spoof for so many years and why stopping white-collar criminals from impeding a fair and uncorrupt market is difficult. According to the Wall Street Journal, "Unlike futures, which the CFTC [Commodity Futures Trading Commission] oversees, no single regulatory monitors trading in Treasury securities," which is handled on a widely dispersed electronic network, making the auditing process very difficult. Only one is owned by the Chicago Mercantile Exchange (CME). More importantly, the CFTC's spoofing law fails to cover Treasury security trading. The article added, "While the CFTC has brought enforcement cases against banks over spoofing in Treasury futures, only the DOJ and SEC can police the trading of Treasury bonds, bills, and notes," which they oversee with a relaxed approach.
It hints at the irony - while the DOJ is fighting crime and the SEC is cracking down on companies trying to violate federal securities laws, they also have a more of a hands-off approach to "the markets that trade its own debt." Some have proposed that Treasury futures should be tracked in the way equities are in terms of historical price and ownership trail. This would allow for better accountability and oversight and less of a temptation for traders to manipulate. Also, just as the CFTC regulates the derivatives markets, a single government agency should also manage Treasury futures. Maybe it should be the CFTC? Some believe it would be relatively easy given that it already has processes and sound governance in place for a similar market. Additionally, its goal is the same as that of the securities market, which is to protect market integrity. Whatever DOJ and SEC decide, one thing is clear as Kevin McPartland, head of market structure and technology research at Greenwich offered, "A move to examine trading practices in Treasury securities would be a big step in a market that has historically had little transparency."