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Spoofing, Surveillance and Supervision

Traders Magazine Online News, June 21, 2018

This piece was originally published by the National Society of Compliance Professionals

This article is re-printed with permission from NSCP Currents, a professional publication published by NSCP.  This article may not be further re-published without permission from NSCP.

The U.S. Commodity Futures Trading Commission (CFTC) and futures self-regulatory organizations continue to aggressively pursue “spoofing” cases against traders. When evidence of criminal willful intent exists, they refer certain matters to the Department of Justice (DOJ) for criminal prosecution. The CFTC settled its first spoofing case in late December 2016.1 In early November that same year, the DOJ obtained its first criminal conviction for spoofing.2 Since that time, the CFTC has expanded its efforts in this area to target firms for failing to supervise traders accused of spoofing activity. In this article we analyze the messages sent by the CFTC with its regulation by enforcement efforts, and the interplay of spoofing, surveillance, and supervision.


We begin with a summary of applicable spoofing and supervisory laws and then analyze the pertinent CFTC enforcement cases. Section 4c(a)(5)(C) of the Commodity Exchange Act (CEA) makes it unlawful for “[a]ny person to engage in any trading, practice, or conduct on or subject to the rules of a registered entity that…is, is of the character of, or is commonly known to the trade as, ‘spoofing’ (bidding or offering with the intent to cancel the bid or offer before execution).”

The CFTC’s “Failure to Supervise” law is Regulation 166.3, and it requires a firm to employ diligent supervision of its employees and activities:

Each Commission registrant, except an associated person who has no supervisory duties, must diligently supervise the handling by its partners, officers, employees and agents (or persons occupying a similar status or performing a similar function) of all commodity interest accounts carried, operated, advised or introduced by the registrant and all other activities of its partners, officers, employees and agents (or persons occupying a similar status or performing a similar function) relating to its business as a Commission registrant.

Case law has interpreted this duty of diligence broadly and an underlying violation is not required.3 A violation under Regulation 166.3 is an independent violation for which no underlying violation is necessary.4 A violation of Regulation 166.3 is demonstrated by showing either that: (1) the registrant’s supervisory system was generally inadequate; or (2) the registrant failed to perform its supervisory duties diligently.5 Evidence of violations that “should be detected by a diligent system of supervision, either because of the nature of the violations or because the violations have occurred repeatedly” is probative of a failure to supervise.6

On January 19, 2017, the CFTC filed its first settled failure to supervise case against a registered firm for supervision failures related to spoofing and ordered the firm to pay a $25 million civil monetary penalty.7 The order instituting the proceeding (OIP) found that:

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