In the past several years, TradingSchools.Org has written several articles regarding CFTC enforcement actions pertaining to illegal spoofing of the Futures markets.
Before we jump into the substance of this article — which is an interview with an actual “spoofer,” I should take a moment to explain to the audience what is spoofing.
What is spoofing?
Spoofing is illegal. In fact, spoofing is a felony. This means there are civil penalties, which are typically enforced by the SEC or the CFTC, and there are criminal penalties which are usually enforced by the US Attorney.
Spoofing is the act of placing orders into the market that you have no intention of actually filling.
The act of spoofing is to signal to the market that a large quantity and volume of orders is about to aggressively push a market higher, or lower.
Think of these orders as “bait,” where the cute little goldfish (you) is drawn towards the “bait” of high volume order entry…just outside of the current price.
The desired effect is that the cute little goldfish — looking for a meal — will chase the “bait” only to discover that the “bait” is really just a trap.
Let me give you a real-world example of how spoofing works. In this example, we will use court records where JP Morgan Chase agreed to pay $920 million in penalties and fees for spoofing the metals and treasury markets over several years.
How the scam worked…
Prop traders employed by JP Morgan Chase opened dozens of Futures trading accounts with very high balances. These high balanced accounts gave the prop traders the ability to enter extremely large orders that would sit just outside of the range of where most buying and selling activity was occurring. This is the “bait.”
Mom and pop investors, looking to buy or sell Futures for short-term speculation would see massive quantities of orders flooding into the market. This flood of orders would entice small investors to then enter market orders believing that the price would head in the direction of the “spoofers.”
Once the market orders were filled in the manipulated direction, then the “spoofers” would take the opposite position of the mom and pop investors.
The “spoofers” would then employ the scheme in the opposite direction, causing the mom and pop investors to liquidate the positions for an immediate loss.
The winner would be the “spoofer.”
Banks like JP Morgan Chase employed this strategy for years, constantly pushing and pulling markets from point A to point B, causing massive frustration and losses for small investors.
Do banks like JP Morgan Chase face criminal prosecution? Sure. But as you see from the settlements, the bank simply pays the fines by diluting shareholder equity. And what about the prop traders that work for these firms? Usually, they sign Deferred Prosecution Agreements where the trader admits to wire fraud, but as long they dont do it again, then they will not be prosecuted for the original fraud.
Imagine if you robbed a bank and then get caught. You would expect to be heading to the pokey. But what if you agreed to pay a big fine and agreed to never rob a bank again…this is a Deferred Prosecution Agreement.
Deferred Prosecution Agreement rarely work. As you will read later, in our interview with a convicted spoofer, he explains a simple workaround to not trigger the Deferred Prosecution Agreement.
Should this be a crime?
Plenty of readers will say, “this is a free market economy” and “let the free market fix this problem.” Or, “if people are stupid enough to fall for the bait, then they deserve to lose their money.”
That is a valid argument. The only problem is that the free-market approach is not working. As a matter of fact, spoofing is only getting worse.
Electronic trading has only been around for Futures markets since the mid 1990’s. As computers have become faster, and electronic trading has expanded…this has created a ripe environment for software developers to create applications that flawlessly perform the trick of spoofing.
These software applications are extremely complex, and require massive resources to maintain and manage. Effectively, they are electronic pick pockets navigated by the hand of humans.
The free market people will say, “its just part of the marketplace.” And, “the marketplace is always fair.”
But it is not really a fair market because small investors, like you or I, do not have the resources to build these complicated spoofing programs.
Additionally, even if we could theoretically build such a device, we would still need millions of dollars in capital and hundreds of trading accounts in which to create the illusory market dynamic.
In short, the game is rigged against small investors. And no “free market” approach is ever going to balance the equation to give us a fair shot.
Nobody is talking about the problem of spoofing
The mainstream financial media hardly ever publishes articles about spoofers. Its a dry topic. But I have attempted to put this issue front and center, because its likely effecting you, and you simply are not aware its happening.
For instance, you probably did not know that on September 30, 2020, the energy company Sunoco agree to pay $450k for spoofing the crude oil contracts.
Also, on September 30, 2020, ARB Trading Group agreed to pay $745k for spoofing the metals and agriculture markets.
On September 29, 2020, a Slovakian named Roman Banoczay Jr. was busted for spoofing the crude oil Futures market.
This douchebag earned $332,000 in profits in only eight trading days. And he did this by spoofing the market by fraudulently entering and canceling over 55,000 phony trades during this eight-day crime spree.
Remarkably, this isn’t the first time that Roman has pulled this stunt. In fact, just last year (2019) he was fined nearly $220k for doing the exact same thing.
On September 28, 2020, Thomas Donino of FNY Partners was ordered to pay $585k for spoofing gold and crude oil Futures contracts.
And let’s not forget that JP Morgan just got busted and agreed to pay nearly a billion dollars on September 29, 2020.
This is all within a single week.
Everyone is doing this scam. In fact, the problem is so fucked up, obnoxious, and widespread that the CFTC is now going after the software developers that design and implement these “mini pick pocket” spoofing programs.
This little fucker in Illinois just got hit with a $25k fine for making and selling one such program that was used to spoof the Emini SP500 market.
If you spend any amount of time reading the CFTC press releases, (like I do) you will see just how massive the problem has become. I could spend the next year writing hundreds of articles about individual enforcement actions, but it would waste more internet space than online pornography.
In spite of all of these complaints, why are we still having this problem? The answer is quite simple…the regulators are not criminally charging the violaters with wire fraud. Sure, they were doing it (criminal prosecutions) prior to 2016 and were actually putting people in jail for ripping off consumers. Albeit for short periods of incarceration.
But post-2016, it seems that fraudulent schemes, like spoofing, is something our government no longer considers an actual criminal financial crime. Rather, they only now consider it a means to collect penalties and fee’s from the offenders.
Now, I don’t want to be too hard on the CFTC. As many readers are aware, I file more CFTC whistleblower complaints than Bernie Sanders harpoons Donald Trump. But this spoofing problem needs to be solved. I fear it won’t actually stop until the CFTC starts once again to put pressure on the US Attorney to start prosecuting.
Interview with a spoofer
TradingSchools.Org has been attempting to get an actual spoofer interview for nearly two years.
Its a lot like interviewing a drug trafficker for a TV documentary. We have all seen these shows where the drug trafficker wears a bandana, sunglasses, and a hat, with a disguised voice. And you get to follow the drug trafficker around and see how he stuffs the drugs into a large can of jalapeno peppers, which are then smuggled over the border.
Finally, in late 2019, after desperately hassling a London based prop trading company — where several of the traders were busted for spoofing US Futures contracts — we got someone to anonymously go on the record. To explain to the audience how they are currently pulling off the scheme.
The following are the question and answers we asked the spoofer…(slightly edited)
How old are you, when did you start spoofing, were did you begin spoofing?
I am currently 33 years old and I currently live somewhere in Europe. When I was 25 and fresh out of University, I took a job as a prop trader in London. I will not name the firm, but if you Google ‘London spoof trading’ you will see the name of the firm.
The trading firm allowed traders to pool their money into an omnibus account which gave us extremely large amounts of leverage to trade US Futures contracts. Although we knew spoofing was technically illegal, this was the UK, and so we really had little fear that US criminal authorities could possibly track us down.
The act of spoofing started with just a few traders in the office making outsized and consistent income, whereas everyone else was barely making any money. We later discovered that these individuals had figured out how to spoof by manually (click trading) entering massive quantities of trades and then just as quickly cancel the orders before they would be filled. Once cancelled, the market would usually head in the opposite direction of the cancelled orders.
Once everyone figured out the “trick” then everyone was doing it. But this required ever larger amounts of capital to get ever larger amounts of leverage.
Of course, once our office started doing in in scale, then neighboring prop companies started also doing it.
This set off an arms race to see who could bundle the largest accounts and spoof ever greater amounts of phony orders. The whole thing became comical and readily apparent as thinly traded markets like agriculture which would normally see a few hundred contracts every five minutes would see thousands of phony order entries every minute.
As more and more people did it, then simple (click) trading from a mouse became too slow. The next step was people began to hire programmers to create sophisticated order types that would layer thousands of phony orders across a wide range of prices. As the market moved in the direction of the fake orders, the program was lightning fast and would cancel the orders. Anyone that attempted to chase the orders was met with disappointment as their orders would fill and then immediately reverse in the opposite direction — as the demand was a mirage.
The game is similar to a real estate auction where people looking to buy would bid against each other to push the prices higher, but little did they know that some of the bidders were actually the person who either already owned the real estate, or had no intention of actually purchasing the real estate. The key was to stretch the small bag holder accounts into phony demand, and then gut them when they unwound the position.
You cant pull this trick on large trading institutions because they dont scalp. Only small accounts attempt to scalp, and these were are our target victims.
The CFTC has become increasing aggressive in rooting out spoofing. Is it working?
Yes and No. The large institutions are now getting caught quite easily. I believe that in 2018 or 2019, HSBC and a few others were caught because the CFTC has some sort of special unit that took a more aggressive posture and began watching more closely.
If you are a large institution, you will have a hard time pulling it off.
But the secret is already out how easy it is to manipulate the order book, and smaller groups of traders have figured out how to work around the regulators.
Can you give me an example of how that is done?
Sure, but its more complicated. And its sort of an open secret. There are several steps to being a “modern” spoofer.
The first step is that you must have at least $500k in order to be given access to place a large bloc of potential positions. This is the minimum amount. And this would work for more thinly markets like soybeans or silver. Don’t even attempt it on financial futures because those markets are way too deep. For crude oil, you should expect to need roughly $1 million in cash.
The second step is to find someone with a clean record, someone you can trust, like a friend, relative, etc. You need to open a smaller account in their name with a smaller amount.
Then you need to “season” the account by adding more funds slowly and then you start placing short term trades, but not attempting to manipulate the market quite yet.
After the account is “seasoned” for awhile, and the balance is high enough, and you have not raised any red flags, you then prepare for the manipulation event.
What does that mean, “prepare” for the manipulation?
Suppose that you want to manipulate silver futures? You would want to only trade during a historically low period of volume, like one hour after the open, after prices have moved significantly and then consolidate into a tighter range.
Basically, you want to avoid trading against institutional investors and only trade in lower volume areas where small investors are likely to chase a breakout.
How often can you pull the trick before anyone notices?
One or two days. You want to plan the event with the intention of closing the account in one or two days after you pull profits. However, sometimes it does not work, and you can lose money. But you still need to close the account immediately after attempting to manipulate because you might raise a red flag.
Is this enough time to actually make any money?
Yes. A good one or two days can net you $50k and then you quickly close the account and have your money wired out immediately. If you attempt to manipulate the market more than a couple of days, you run the risk of being flagged and having your account frozen. In this scenario, you are essentially caught and could potentially be in a lot of trouble.
The key is to make the money fast and get your money out even faster.
Ok, so after you pull off the manipulation and win a chunk of money, and then quickly close the account, what do you do next?
You then try and find a housekeeper in New Zealand with a clean record, that you can trust! We are always looking for someone willing to be the mule. Its risky, but a $5k payday for a poor person is worth the risk.
And beside, what does a poor person in Brazil care if they are fined by the CFTC for millions of dollars? Most people dont even know what a Futures contract is, and have never even heard of the CFTC. Nor do they ever plan on going to the states.
This sounds just like how professional card counters that get thrown out of casinos. Can you do this with stocks?
No. Because stocks now trade on many different exchanges, whether they be the Nasdaq or an internal dark pool. You would never be able to get your order filled because the high-frequency computer traders will pick you apart because they own faster networks and have the advantage of latency.
However, you can do this very, very easily if you have a chat room. This is a scenario where people gather in a chat room and a moderator or “educator” trades and the audience attempts to follow the moderator. Most people call this a “pump and dump.” We see this with many internet chat rooms, but the problem is that in order to pull the scam, you need to spend a large amount of money on YouTube, Insta (Instragram) or Twit (Twitter) to get gullible people to attend the chat room.
Regarding your analogy of card counting. Yes, this is similar to card counting in blackjack. The player sits at the table waiting for the exact moment that the deck is stacked, and then the bets increase from $20 per to the table maximum. The casino knows what’s going on, but they cannot react fast enough.
Do you have any advice for the small investor that reads a blog like TradingSchools.Org?
If you are going to day trade Futures, then you should know that crude oil, all the metals, and treasuries are all highly manipulated markets. Especially crude oil. What can appear to be a breakout is nothing more than someone spoofing the market.
The way to trade these thinner markets is to hold positions for longer periods of time, this negates the chance you are stepping into a spoofed market. Also, try and hold a position as long as possible as the trend usually continues to the close.
For financial futures like the Emini SP500, the market is so deep that its difficult to spoof. And when trading this market, always use a limit order to enter and exit a trade. Day traders that use market orders never survive for long as their account gets ground down to nothing. For day traders, the edge is very small.
Any final thoughts?
Yes, please don’t try and spoof. I believe that the CFTC will only become quicker at freezing accounts and locking up money. So unless you want to become part of a collective, or get a job at a large institution where they can legally steal $100 million and only pay $1 million in fines, then it’s not worth the attempt because you might end up in jail.
For the time being, many of us are doing it quite well and profitably, but the proverbial writing is on the wall that it wont last forever.
Wrapping things up
Thanks for reading this article. Like I said, its a dry topic. But I found it interesting to see these modern day “financial pirates” attempt to circumvent the regulators with ever more clever “cat and mouse” games.
My suspicion is that spoofing will never stop. Just like drug dealing will never stop. Yes, you can lock up people for 100 years, but as long as the profit motivation remains…people will chase the money.
And, as long as the larger institutions can continue to receive “Deferred Prosecution Agreements” then these quasi-enforcement actions will be continued to be abused.
After all, when did a “slap on the wrist” ever work on a clever thief?