CFTC's Chilton Admits Silver Market Subject To "Fraudulent" Influences, Says Manipulation Should Be Prosecuted

Tyler Durden's picture

If this is not some nasty and quite early April Fool's joke, this is very, very bad news for JPMorgan:

  • BN CFTC CHILTON MAKES STATEMENT ON SILVER MARKET
  • BN * SILVER PRICES SUBJECT TO "FRAUDULENT" INFLUENCES, CHILTON SAY
  • BN *"REPEATED ATTEMPTS" MADE TO INFLUENCE SILVER MARKET, CHILTON
  • BN *SILVER MANIPULATION SHOULD BE PROSECUTED, CHILTON SAYS

Now... where are all of those tin foil hats...

The below has just appeared on Reuters. It seems the CFTC has its cross sights on quote stuffers. It is about damn time.

The U.S. futures
regulator laid out plans on Tuesday for how it could use new and
beefed-up legal tools to foil traders who seek to manipulate prices or
defraud investors.

The Commodity Futures Trading
Commission said it also wants to ask for comments on whether to crack
down on certain practices used by high-frequency traders -- such as
"quote-stuffing" -- but it stopped short of immediately proposing new
rules specifically aimed at algorithmic trading.

In
its latest set of proposed regulations following a sprawling Wall
Street reform law, the CFTC sought to clear up some confusion about its
traditional test for price manipulation, an effort to improve on its
dismal record of having won only one such case in its 36-year history.

The
rule, which will apply to all markets overseen by the CFTC, including
swaps, also creates a "broad, catch-all anti-fraud provision" that does
not require the CFTC to prove a trader fully intended to cause fraud,
CFTC officials said.

The agency's
only successful manipulation prosecution was against a broker charged
with manipulating settlement prices for electricity futures in 1998.

More recently, manipulation charges against four propane traders with BP (BP.L)(BP.N)
were dismissed by a judge, who called the law "confusing and
incomplete." BP agreed to pay a record $303 million to settle related
charges.

CFTC officials who briefed
reporters on the new package of proposed regulations declined to say
whether the rules would have helped them make their case against the
propane traders.

The agency's five
commissioners, including Chairman Gary Gensler, will vote at a public
hearing on Tuesday on whether to advance the proposal for public comment
for 60 days.

After staff consider
whether to make changes based on comments, the commissioners will need
to vote again to finalize the plan by next July.

The
new rule seeks to marry existing anti-fraud and anti-manipulation
authorities together with a new section that "fills in all the gaps", an
official told reporters.

Existing
regulations address "plain vanilla" person-to-person fraud, and price
manipulation, such as market "corners" or "squeezes", he said.

But
the new provision could capture manipulative trading activity that
"could potentially fall out of one of those two buckets", he said.

Before,
price manipulation cases required the agency to prove traders had the
intent and ability to manipulate prices, tried to do so, and caused an
"artificial price".

That four-part
standard will continue to exist, but the CFTC included guidance that
"artificial price" means a price affected by illegitimate market forces,
the official said.

BANS ON SPOOFING, BANGING THE CLOSE

The Dodd-Frank law also requires the CFTC
specifically to ban three disruptive trading practices as of July 16,
2011 -- a ban that does not require new regulations to take effect.

Included
are "spoofing", whereby traders make bids or offers but cancel them
before execution, and "banging the close" -- acquiring a substantial
position leading up to the close of trade, then offsetting the position
in the final moments to manipulate the closing price.

The
agency has no obligation on whether to go further, but wants to gather
more comments during the next two months about whether it should close a
potential loophole in the spoofing ban, or prohibit any other practices
deemed disruptive.

That will
include "quote stuffing" -- flooding the market with large numbers of
rapid-fire orders and then canceling them almost immediately -- a
practice that some have argued contributed to the May 6 stock market
"flash crash."

The agency will also ask whether it needs to write rules requiring traders to test and monitor their algorithms.

For
months, CFTC commissioners have said the agency needs to use its new
powers to counter disruptive trades made by high-frequency algorithms.

Bart
Chilton, a Democratic commissioner, and Scott O'Malia, a Republican,
have said regulators should hold traders responsible for "rogue algos"
that hurt markets.