Another day, another "crackdown" by the CFTC on an "evil spoofing mastermind."
No, not Virtu, not Citadel acting as a proxy agent for the Federal Reserve Bank of New York, not any of the thousands of frontrunning HFT firms operating behind the scenes as prop-traders pretending to provide liquidity, and not even even your token Indian working out of his parents' London basement blamed for the May 2010 flash crash, but a 33-year old college dropout called Igor Oystacher, co-founder of Chicago-based 3 Red Group.
Igor Oystacher, photo courtesy of the WSJ
At his various trading firms, Igor, who came to Chicago from Moscow and who entered Northwestern Universiry in 1999 to drop out after three semesters, had acquired various nicknames including "Snuggles" and "The Pig", but his best one was also the simplest: "The Russian."
According to an previous profile of Oystacher by the WSJ whose legal case had been in the public domain for months, "he started an internship at Gelber Group LLC, a prominent Chicago trading firm that cultivated a laid-back atmosphere where traders often dressed in T-shirts and flip-flops, say people who knew him at the time. Brian Gelber, the firm’s founder, declines to comment."
Mr. Oystacher stood out for his quick grasp of market psychology. “He was successful within a year of starting,” a former Gelber trader says. “He was putting up numbers it takes people three or four years to get to when they are starting out.”
His aggressive trading, often in stock-index futures, drew attention in the trading community, where some dubbed him “The Russian.”
“He’s been talked about for years,” says John Lothian, a former Chicago futures broker who publishes an exchange-industry newsletter.
Within Gelber, he earned nicknames like “Snuggles” and “The Pig,” although former colleagues say they aren’t sure why. He had down periods: After the 2010 Flash Crash, when the Dow Jones Industrial Average fell nearly 1,000 points before recovering, he told friends he lost significant money on a series of trades.
He left Gelber in 2010. In 2013, the firm agreed to pay a $750,000 fine to the CFTC over orders in 2009 and 2010 that an unidentified trader entered and canceled, allegedly to affect the price of a stock-index future, a CFTC news release says. Gelber didn’t admit or deny the charges in accepting the settlement.
In 2011, Mr. Oystacher and another Gelber trader, Edwin Johnson, started their own firm in temporary space in the old Chicago Board of Trade. They named it 3Red Group after the three red chairs they and another early employee used.
Mr. Oystacher continued to make an outsize mark on futures markets. On one day in 2012, for instance, he traded more than 80,000 E-Mini S&P 500 futures—a type of contract on the stock index—with a combined notional value of nearly $6 billion, trading records show. His trading could sway markets, traders say.
And so he did, but not in the normal way, but mostly through the familiar practice of spoofing, whereby a trader telegraphs a large position on one side of the orderbook, usually just below or above the NBBO, ready to cancel them at a millisecond's notice should the market move against him, and when the market moves his way, immediately takes the other side of the trade.
After years of ignoring such manipulative activity, regulators noticed: the CFTC began investigating the trading of Mr. Oystacher and 3 Red in 2011. Among the exhibits is a 2013 letter from a senior CFTC trial attorney, Jon Kramer, including a subpoena for 3Red. Mr. Kramer declines to comment.
In November 2014, the CME fined him $150,000 and banned him from trading on the exchange during December 2014. Mr. Oystacher didn’t admit or deny any rule violations in agreeing to the fine and trading ban, the CME notice says.
Then earlier today, in a repeat of the crackdown against that other "evil spoofing mastermind" Navinder Sarao, the CFTC charged Oystacher, and his trading firm 3 Red "with Spoofing and Employment of a Manipulative and Deceptive Device while Trading E-Mini S&P 500, Copper, Crude Oil, Natural Gas, and VIX Futures Contracts."
According to the CFTC Complaint, on at least 51 trading days between December 2011 and January 2014, Oystacher and 3 Red intentionally and repeatedly engaged in a manipulative and deceptive spoofing scheme while trading in at least five futures products on at least four exchanges: the E-Mini S&P 500 (S&P 500) futures contracts on the Chicago Mercantile Exchange (CME); crude oil and natural gas futures contracts on the New York Mercantile Exchange (NYMEX); copper futures contracts on the Commodity Exchange Inc. (COMEX); and the volatility index (VIX) futures contract on CBOE Futures Exchange (CFE). The Complaint explains that their scheme created the appearance of false market depth that Oystacher and 3 Red exploited to benefit their own interests, while harming other market participants.
Frequent readers are very familiar with not only the mechanics of spoofing but how it is abused. For those unfamiliar with spoofing, the following WSJ diagram lays it out:
Curiously, those who have been charged are usually lone human traders, when ironically the biggest spoofing culprit are nameless, faceless algos, or the hedge funds behind them, and one name in particular: Chicago's Citadel.
But we digress. Here is what Aitan Goelman, the CFTC’s Director of Enforcement, commented: “Spoofing seriously threatens the integrity and stability of futures markets because it discourages legitimate market participants from trading. The CFTC is committed to prosecuting this conduct and is actively cooperating with regulators around the world in this endeavor.”
In the case of "The Russian", there clearly was a lot of spoofing. As the following table from the charging document reveals, on at least 51 trading days, Igor was spoofing everything from copper, to crude oil, to gas, to VIX, to E-Minis, for a total of 1,316 spoofing incidents from 359,790 contracts.
While the rest of the complaint does not reveal anything else we didn't already know, like for example why do regulators focus almost exclusively on foreigners or those who are otherwise Wall Street "outsiders", it does reveals something amusing: the average duration of spoof events which Igor engaged in. As the following table shows, the average spoof had a duration of well under 1 second, or 0.693 seconds to be precise, in order to confuse not so much human traders but HFT algos on the other side who are used to dealing with other algos but not with human interlopers such as Igor, who found the weakness in the algo methodology and abused it to make profits over the years.
There is much more detail in the actual document on just how Igor and others like him constantly spoof virtually every futures market in existence: we urge readers to skim it in case they need any further validation why the market remains broken and why despite spoofing having been clearly barred, continues to this day.
Oh yes, for those who were unaware, Dodd Frank made spoofing illegal in 2010. Five years later it takes place every single day.
Why was Igor the latest to be thrown under the bus instead of some HFT firm? Well, just like Nav Sarao he had found the glitch in the HFT market rigging system, and was outmanipulating the manipulators. He had to be put away.
And while the CFTC may have thrown the book at "The Russian" today, courtesy of Nanex we present a glaringly obvious instance of spoofing in the E-mini from just this past Thursday, one clearly taking place with the help of 2000-contract lots.
Will the CFTC crack down on these daily ongoing and very illegal instances of market manipulation, which are now beyond obvious to everyone who still has a passing interest in the markets? Well, if the perpetrator is some Russian or Indian, of course. If the name of the culprit, however, is Citadel, then absolutely not. After all the NY Fed has to maintain its control over the market's microstructure somehow.