The US Commodity Futures Trading Commission (CFTC) has issued an order filing and settling charges that Daniel Shak of Las Vegas, Nevada and SHK Management attempted to manipulate crude oil futures contracts.
The contracts in question were Light Sweet Crude Oil (WTI) futures contracts on the New York Mercantile Exchange (NYMEX).
According to the charges SHK Management also violated intraday spot month speculative position limits applicable to WTI futures contracts on two days in 2008.
The CFTC Order requires Shak and SHK to jointly pay a USD400,000 civil monetary penalty, permanently bans Shak and SHK from trading in any crude oil markets, and imposes a two-year ban from trading outrights for any product or financial instrument regulated by the CFTC during the Close, among other sanctions. Shak was a former principal of SHK.
According to the CFTC order, on each of the two trading days in 2008, respondents established substantial net short positions in WTI futures contracts through Trading at Settlement (TAS). TAS is an exchange rule which permits the parties to a futures trade during a trading day to agree that the price of the trade will be that day’s settlement price − or the settlement price plus or minus a specified differential.
The order finds that Shak and SHK intentionally traded a significant volume of futures contracts in the opposite direction, building a long position, before and during the two-minute window of the closing or settlement period of trading on the contract (“the close”) in an effort to improperly influence and affect the price of the WTI futures contracts, including the settlement price. The settlement price of WTI futures contracts, including the TAS WTI futures contracts, is determined by the volume-weighted average price of trades executed during the close. This strategy of trading heavily on one side of the market during the close is commonly known as “banging the close.”
“Today’s action by the CFTC shows that the misuse of TAS trades and offsetting of TAS positions during the close of trading to affect settlement prices unlawfully will not be tolerated,” says Gretchen L. Lowe, acting director, CFTC division of enforcement.
According to the order, in executing this trading strategy, the respondents attempted to drive the settlement price of the WTI futures contracts higher than the average cost of the long position that respondents had established before the start of trading during the close. If successful, respondents would profit based on a favourable price differential between the higher settlement price of its substantial short position and the lower prices at which it bought WTI futures contracts, according to the order.
SHK, through Shak and another SHK trader, executed this manipulative strategy in a trading account held in the name of a pool controlled by respondents, and, at the same time, Shak executed the strategy in his personal trading account, the order finds. Respondents’ trading on an aggregate basis on these two days resulted in positions that exceeded NYMEX speculative positions limits by more than 500 contracts on the first trading day and more than 1,000 contracts on the second trading day, according to the order.