CFTC Fines, Temporarily Bans Traders for Attempted Manipulation

The newly empowered CFTC has been bringing an increasing number of market manipulations cases. Last month, for example, the agency teamed with the Department of Justice, the U.K.’s Financial Services Authority and the Dutch prosecutor to extract a billion dollar settlement from Dutch financial giant Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. for manipulating benchmark interest rates. In the Matter of Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., CFTC Docket No. 14-02 (October 29, 2013). While not generating the same huge settlements, the regulator has also been brining manipulation cases centered on the oil and other markets. See, e.g., In the Matter of Panther Energy Trading LLC, CFTC Docket No. 13-26 (July 22, 2013)(settled action for “spoofing” in the oil futures market in which firm paid almost $4 million to U.S. and U.K. regulators and was banned from trading for 1 year); CFTC v. Optiver, Civil Action No. 1:08-CU-06560 (S.D.N.Y. Filed April 19, 2012)(settled action for banging the close in oil futures markets in which firm paid $13 million to settle and agreed to trading restrictions while individual were banned for periods ranging from 2-8 years).

This week the agency brought another action centered on the oil markets, this time against a floor broker and commodity pool operator alleging attempted manipulation. In the Matter of Daniel Shak, CFTC Docket No. 14-03 (Nov. 25, 2013). The proceeding named as Respondents Daniel Shak, a registered broker, associated person of a Commodity Pool Operator or CPO and a member of the NYMEX and his firm, SHK Management, LLC, a CPO.

The Order alleges that on two trading days in 2008 Respondents attempted to manipulate the closing price of West Texas Intermediate or WTI futures contacts, driving the closing price higher to benefit a relates short position. Each time the effort was to enhance the profits of a net short position know as Trading At Settlement or TAS. The settlement price for TAS positions are a function of the closing price, typically being priced at ranges between -10 and +10 ticks of it. The TAS position is typically profitable if the offsetting futures contracts used to close are less than the settlement price plus the TAS differential. The converse it typically true for a loss.

Here Respondents in one instance accumulated a large net short TAS position of 3,457 prompt-month WTI contracts in the SHK pool and Mr. Shak’s personal trading account. In the last three minutes before the close Respondents began aggressively trading in the opposite direction, accounting for almost 30% of the purchases. This drove prices higher, benefiting their TAS position.

Respondents essentially repeated this strategy on a subsequent trading day. At that time they established a short TAS position of 3,996 prompt-month WIT contracts in both the firm and Mr. Shak’s accounts. Eight minutes before the close Respondents began making purchase. At two minutes before the close they increased their purchase rate, accounting for just over 22% of the buys. During the close they continued to increase their purchases which by the end represented over 70% of the outright buys on the day. The purchases were made at increasing prices.

The Order alleges an attempted manipulation. Only two elements are required to establish this charge: 1) an intent to affect the market price; and 2) an over act in furtherance of that intent. The traders are required to act with the purpose, or conscious object of, causing or effecting a price or price trend. In this case the requisite intent was inferred from the actions of Respondents at, and during, the close which drove the prices continually higher, thereby benefitting their short position. Respondents also violated the applicable position limits and Mr. Shak, under CEA Section 13(b), is responsible for the actions of his company. The Order thus alleges violations of Sections 6(c), 6(d) and 9(a)(2) of the Act and the applicable speculative position limits.

To resolve the proceeding Respondents consented to the entry of cease and desist orders based on the Sections cited in the Order. They also agreed to pay, jointly and severally, $400,000 as a civil penalty. SHK’s registration as a commodity pool operator and Mr. Shak’s as an associated person were suspended for two years and both are prohibited from trading in any instrument relating to crude oil futures contracts for two years.