The US Commodity Futures Trading Commission (CFTC) has filed a civil enforcement action in the US District Court for the Southern District of New York against Donald R Wilson and his company, DRW Investments.
The CFTC’s complaint charges Wilson and DRW with unlawfully manipulating and attempting to manipulate the price of a futures contract, namely the IDEX USD Three-Month Interest Rate Swap Futures Contract from at least January 2011 through August 2011.
The complaint alleges that as a result of the manipulative scheme, the defendants profited by at least USD20m, while their trading counterparties suffered losses of an equal amount.
According to the complaint, in 2010 the Three-Month Contract was listed by the International Derivatives Clearinghouse (IDCH) and traded on the Nasdaq OMX Futures Exchange, and was publicised as an alternative to over-the-counter, i.e., off-exchange, products. Wilson and DRW believed that they could trade the contract for a profit based on their analysis of the contract.
At the end of 2010, Wilson caused DRW to acquire a large long (fixed rate) position in the Three-Month Contract with a net notional value in excess of USD350m. The daily value of DRW’s position was dependent upon the daily settlement price of the Three-Month Contract calculated according to IDCH’s methodology. As Wilson and DRW knew, the methodology relied on electronic bids placed on the exchange during a 15-minute period, the “settlement window,” prior to the close of each trading day. In the absence of such bids, the exchange used prices from over-the-counter markets to determine its settlement prices. Wilson and DRW anticipated that the value of their position would rise over time.
The market prices did not reach the level that Wilson and DRW had hoped for and expected, according to the complaint. Rather than accept that reality, Wilson and DRW allegedly executed a manipulative strategy to move the Three-Month Contract market price in their favour by “banging the close,” which entailed placing numerous bids on many trading days almost entirely within the settlement window, none of which resulted in actual transactions as DRW regularly cancelled the bids. Under the exchange’s methodology, DRW’s bids became the settlement prices, and in this way DRW unlawfully increased the value of its position, according to the complaint.
Gretchen L Lowe, the CFTC’s acting director of enforcement, says: “Traders cannot engage in manipulative acts to affect the price of futures contracts to achieve their desired profits, regardless of the so-called motive. Today’s action demonstrates that the Commission will vigorously prosecute such cases to protect the integrity of the markets.”
According to the complaint, Wilson and DRW allegedly caused and profited from artificial prices on the Three-Month Contract over a period of at least 118 trading days. Because Wilson and DRW allegedly caused artificial prices in multiple maturities of the Three-Month Contract each day, the manipulative scheme allegedly affected the prices of over 1,000 futures contracts, according to the complaint.
In its ongoing litigation, the CFTC is seeking permanent injunctive relief, disgorgement, restitution, civil monetary penalties, trading suspensions and bans, and payment of costs and fees.