No, Mr McDonald, it's quite the opposite. The important message is that if your organization can keep the profits from criminal activities higher than the penalties, they can perpetuate it. That's because there are virtually no other consequences for any individual criminals personally responsible for this, and none of them was persecuted, punished and forced to give up his ill-gotten gains.
I have no answers.
-Frustrated consumer protection attorney
So yeah also not the biggest punishment, but more then what these bankers got, they are still allowed to trade and no confinement.
Whether he was the only one to do it and whether he was the main cause of crash is not clear, but at least he had a part.
I personally feel like if you allow flash trading to have such an advantage over investors without those means it shouldn't be illegal to exploit it, but anyway.
It's a bit like killing a person using a gun and killing a person as a result of driving like the rules don't apply to you. Once it is established that you did the act, the first one undoubtedly puts you in jail for a very long time no matter who you are and the second one may get you a fine and no jail time so that no harm is made to your career(like the Qatari royal who killed a pedestrian in London).
Perhaps the government is lying about this, but at that point, you're just believing a conspiracy.
A cursor search shows that the fine is less than 10% of their last quarter NET income of 12.1 billion.
I would certainly keep doing illegal things if my only penalty was a simple fine like that every 10 years.
It's hard to not feel shocked when seeing numbers in the billions but you can't forget they are often accompanied by an equally shocking denominator.
Unless you are implying that JPM profited more than $172 million, the report suggests the government took the profits.
The fine should be ALL of the ill-gotten gains and then a naughty boy fine on top of it. To do otherwise means that you did not do justice.
Reputational losses are also a thing, agencies and whistleblowers will be paying a lot more attention to this sort of thing from JPMorgan from now on. Maybe a lesser effect would be morally conscious people (in finance haha) choosing not to work there.
Of course it is also possible that Chase PR machine greases the right hands to negate all of the downsides, and then you have a point that current political/regulatory climate is allowing this is be a profitable business model.
Jail time however, is not something everyone will want to gamble on.
So, it should be what you said + jail.
Better ways is to launder your ill gotten gains through property, let a few more respectable people take a slice of the cake like lawyers, property surveyors, etc etc and then it all becomes good until you become a political pawn.
Edit.
I should add, even when "entrapped" by the FBI with a few $million of coke and its recorded on hidden camera's you can still get off if you have been useful to the country or a few country's, in this case playing a part in reducing the troubles in Northern Island.
Let me introduce. https://en.wikipedia.org/wiki/John_DeLorean https://www.youtube.com/watch?v=edsAIPfw_dE And then Hollywood had their own idea's https://www.youtube.com/watch?v=Psxktpxkc6o
It seems the FBI were not the brightest, considering how geopolitics works, or are they mere attack dogs?
The DeLorean is 40 years old now!
I work in the industry and follow things like this and I haven't heard the US government saying they would like to charge JPM but they can't due to destabilizing the US financial system.
I'll even let you go back 5 years to find such a quote!! I don't think i've heard of this happening.
It's not exactly a secret that some market participants work out some kind of imbalance measure, and of you've ever implemented a system like that, like I've done, it will have crossed your mind that you could shove a load of orders in that mask the imbalance for everyone else. But you have heard of the spoofing rules and you don't do it. If we want a functioning market without a reputation for sharks, there's some rules to be followed.
Iirc they got a guy thrown in jail for this? Sarao or something like that? He had someone build him a spoofing machine and made a lot of money, though it's not clear to me how much was from doing this specifically.
In case you're wondering about that intention to cancel phrase, of course there are participants like market makers who do cancel a lot of orders. In that case it's a matter of them following the market in providing liquidity, they are not doing it to fool everyone.
That's the role of shareholders AFAICT, to hold their board and the company accountable. Fail to do so and lose your shareholding seems the right direct risk.
The fines could also be a lot larger, because there is minimal risk of bankrupting a business from diluting existing shareholders. A 1% shareholder hit would be $4B at current market cap. Make it 5% and really make shareholders pay.
Either way you've lost 1%, but you can decide whether to hold the upside exposure and voting control.
I think the key is the size of the fine. $1B to JPM is not really a whole lot. Maybe scaling the fine according to the size of the entity might make sense, but then there's a question of why everyone else at JPM is getting fined simply for doing their job in the same building as the guys who did this.
Edit. On second thought I guess you mean there will be a restriction on buying back the shares?
Shareholders can change corporate behavior lik Carl Icahn but here it seems like it was very opaque to even monitor, the other way they can enforce good behavior is to sell the stock.
It's annoying to see, but not a big deal per se: your order book imbalance features just get weighted less heavily and you move on. ofc spoofing is illegal in tradfi, but if it wasn't, I kind of doubt it would even matter: market participants would adapt and the world would move on.
It's completely legal. If big financial institutions would risk fines and prosecution to do this is a market where it's illegal, what on earth makes people think it wouldn't happen in markets where it's legal?
> There are even tier 1 tradfi market makers who heavily engaged in not just spoofing but quote stuffing as well across crypto markets.
I assume you're alluding to Cumberland/DRW?
>Michael Coscia in 2013.
>Coscia was sentenced to three years in prison for spoofing futures markets using a specially designed computer program, making an estimated $1.6m (£1.2m).
I'm sure there are other anecdotes, but it left me feeling like at least this government org was doing what it was supposed to.
"Spoofing" simply means placing orders on the exchange orderbook which one supposedly does not intend to execute.
I've never understood this, because any bid/ask order on the orderbook CAN be executed against, until it is canceled. If they were "flashing" large bids/asks that were being immediately canceled to trick other algos into lifting, that is annoying but it's the algos that fall for the spoof that are stupid. The algos should just hit the large spoof bid and the spoofer will be left holding the bag.
If there are offers starting from 100,1 and bids starting from 99,9 but there is only one offer below 105 and many bids at 99,0 that is a valuable signal. From a 'random walk' perspective you would expect the price to rise quite soon. By spoofing you can either create this imbalance to get people to falsely trade on the imbalance, or you can hide this imbalance once you notice it so only you get to profit off the signal.
Hence, spoofing can be manipulative even if being a decent distance away from the current price, hence not running that much risk of the orders being filled.
Their only purpose here was to: "Through these spoof orders, the traders intentionally sent false signals of supply or demand designed to deceive market participants into executing against other orders they wanted filled. "
That being said, algos could have hit the large spoof bid, but imagine if it was legitimate, that would mean price movement against them and leaving them holding bags.
I think this is debatable. There's an ideal where no one spoofs and market prices are accurate at all times. But it's very difficult to enforce perfectly - there is no bright line test for whether you wanted a trade to execute or not, when you placed it. So in practice you are just always partially enforcing it and keeping the manipulation not too obvious.
The other possible solution is that anyone can place any order of any type any time they like, for any reason. The constraint is that if you place an order and it trades, you have to honour it. This leads to a situation where no one can trust the order book, but traded prices do reflect market truth - because of course no one wants to trade at an inaccurate price (not in their favour). The plus side is that it's much easier to make the system work. You don't have to run an arms race with people using sophisticated manipulation which can't yet be detected or prevented.
It's not clear whether order books giving (somewhat) accurate information is worth both the direct costs of enforcement and the potential unfairness of some spoofing rules being enforced and some not. It might be - but it's not clear that it definitely is.
I would guess that they sent a bunch of orders and them immediately cancelled them. If that's what they did, then by the time other market participants see those orders (remember network latency), the orders will already have been cancelled, in which case it would be literally impossible to trade against those orders after having seen them in the market data.
"Act fast because these are selling like hotcakes!"
"I've got another guy who wants to buy the car for $5k but I'd sell it to you for $6k if you can bring cash today."
"It's a buyer's market right now, so we should probably be willing to negotiate on the price as we sell your home."
If the going rate for a bar of chocolate is $1, and i add 100s of listings for a bar of chocolate at $1.10, then if you buy my spoof chocolate I’ll have earned 10 cents in arbitrage.
Orders far from the BBO are clearly irrelevant and those close to the BBO are not "free" for the spoofer given they have to bear the risk that the orders could be filled if the market moves.
Effectively it means anyone cancelling an order has to worry that their action could be interpreted as "spoofing" - which will make market making more risky and expensive.
The only ones this type of enforcement "protects" are are those who naively think they've discovered a strong trading signal based on order volumes away from the BBO. Putting a $1 bid on a Rolex on ebay which is currently attracting $10k bids isn't going to fool anyone into thinking that demand is increasing and is relatively harmless.
For me real manipulation involves actual trades, not cancelled/unexecuted orders, and should be policed stringently. E.g. banging the market at close in order to nudge the closing price in order to boost the value of a position in a different book.
When you post an order to any exchange, you are doing so under the agreement that it is legitimate and that you actually want to be filled at that price. Obviously a participant’s desire desire to be filled at a specific price can change over time, so you’re allowed to cancel orders as well. That makes it difficult to detect and prove that a participant is acting maliciously. But if the BBO isn’t really moving and you keep posting/cancelling orders all day in certain patterns then eventually you’re going to get investigated and told to explain your behavior. And that’s where you might struggle to justify things.
> Effectively it means anyone cancelling an order has to worry that their action could be interpreted as "spoofing"
On human time scales, I think you’re vastly overstating the relevance of accidentally spoofing. For automated trading, yes you have to be careful that your signal doesn’t flicker right on the edge of your threshold. Sometimes that means you need to purposefully limit your order entry or sometimes it’s just a matter of improving your signal.
> The only ones this type of enforcement "protects" are are those who naively think they've discovered a strong trading signal based on order volumes away from the BBO.
I would say most of high frequency trading, which is the primary means of market making these days, relies on the state of the order book as a primary signal. Sure they incorporate other outside information, but when you’re trying to be the fastest, the only data you have to work with that is fast enough is the what the exchange says the order book is. No body’s paying attention to $1 quotes on a $10,000 stock. But a couple dozen price levels from the BBO on GOOG might easily be less 1% away and maybe spoofing there at large sizes might be enough to negatively affect HFT and cause spreads to widen, which hurts everyone.
Basically these regulation exists because only legitimate activity is allowed. Trying to fool other market participants (spoofing) or trying to slow down specific matching engines (quote stuffing) are obviously not legitimate.
> But if the BBO isn’t really moving
That might looks suspicious sure, but there may be other factors (not reflected in the book) influencing a change of desire on my part. For example, what if I only want to buy one of GOOG or APPL and optimistically stick in a low-ball bid on each. If one gets filled, I cancel the other. I never intended for BOTH orders to be filled; is this spoofing? Or half-spoofing? This isn't a real strategy but there are lots of strategies which can look like this.
I agree the state of the order book drives a lot of the behavior of a strategy (but other factors like current position are also critical) but I've never come across a strategy that responds to volume changes far from the BBO. Not to say they don't exist - it's a secretive industry after all - but the changes at or very near the BBO clearly reflect real intent and are weighted accordingly. Quantity change far away from the action is mostly noise.
And getting investigated by CFTC, and CFTC finding proof that you never intended to execute it AND you profiting from steering market in the desired direction which would not have happened without the fake trade...
No, it really doesn't. This is a single enforcement action that probably took months or years to put together. The behavior being policed is traders entering thousands of orders in a short period of time and then cancelling the orders after their real orders were filled, and then repeating this behavior over some period of time. Someone who fat fingers an order occasionally, or changes their strategy in response to intraday market movements has nothing to fear.
>For me real manipulation
Yeah those people also suck and I hope they get what's coming to them, even though I know they won't.
Can someone knowledgeable help me understand why these concepts seem missing from financial market penalties like this? The same people still have their license, and probably didn't even suffer a loss on the activity.
Disgorgement is the illegally gained profits they have to give up. The monetary penalty is the additional deterrent on top.
Does the deferred criminal prosecution mean, basically, pay your fine and don't do it again and you won't be prosecuted? So they really face no long term negatives if they gained more by knowingly breaking the law and paying a fine later?
Capital gains over last few years have been insane. The fine might be higher but a 400MM profit 5 years ago would have easily doubled just investing in SP500.
Similar things happen in retail all the time with no jail sentences, it’s just not algorithmic. “40% off but the offer ends in 3 hours!” is designed to mislead you into thinking there is a short-term mispricing of the product in a very similar way.
Or the real estate market, where basically every single price you see is a lie.
Or the used car market - it’s $15k, but when you go to pay you find out it’s $5k more to actually get the wheels or something.
If only any of these other markets were HALF as clean and transparent as the lit public order books (even if they were unregulated!) they would be massively better than they are now.
"these rules are stupid"
What never ceases to amaze me about free market extremists, is how much they take living in a civilised society for granted.
Try living in Russia where no-one is keeping fraud in check, you will quickly appreciate why we have these rules. A productive economy is imposible where every transaction could mean your savings dissapear into a black hole
I don’t think all rules are stupid, just these particular rules.
The reason I think the rules are stupid is that they don’t prevent fraud, they just prevent behaviour which is considered pretty legitimate in every other marketplace. Like, a spoofed ask price isn’t fraud - you can actually buy the price, and you will be filled.
There is no chance order spoofing will cause your life savings to disappear in a black hole. I think regulation to ensure that remains the case (ie around custody) is very important.
Is it fraudulent that you offer your house for sale, but when you get a few buyers willing to pay the asking price, you move the price up?
Not really. But that is WAY more manipulative than anything that is even POSSIBLE in the public markets, let alone what’s allowed. (The FX markets are an exception where this can happen on certain platforms).
I’m saying we tolerate these behaviours in every other market because they are not really fraud. It’s not lying to say you are bid and then cancel it later, so long as you honor any trades you do get.
This law is unworkable and not sure if there's anything benefit in the end... as in crypto anyone who spoofs can have their bluff called anytime, so perhaps transparent free-for-all market is better for price discovery than pretending "spoof do not exist and are illegal".
OTOH, if I send 100 orders and then immediately cancel all of them, and especially if I do that repeatedly, I can't think of a legitimate reason for that; why not just use a single order? This matters because when those orders show up in the market data, I'll know that all (or most anyway) of them came from me, but other market participants will not know that those orders all came from the same participant.
This kind of behavior would not be difficult to look for in the market data, especially after the fact, so I don't buy the argument that laws which forbid such behavior are 'unworkable'.
Source: have been doing algorithmic trading for many years
A big negative incentive is law enforcement.
Otherwise you could make the same argument for literally every single other kind of crime. Someone does you wrong? Well there's a big incentive to straight up take their kneecaps. But you know, the law and whatnot seriously disincentivizes that kind of behavior.
> This law is unworkable and not sure if there's anything benefit in the end...
So surely you must be mad that JP Morgan got fined for this right? Supportive of Mr Dimon?
Good for them getting one over on ol' Joe Sixpack, right?
[edit] > as in crypto anyone who spoofs can have their bluff called anytime
Not at all, the overwhelming majority of crypto trading happens on centralized, trusted, opaque exchanges. Off-chain.
> The order finds that, from at least 2008 through 2016, JPM, through numerous traders on its precious metals and Treasuries trading desks, including the heads of both desks, placed hundreds of thousands of orders to buy or sell certain gold, silver, platinum, palladium, Treasury note, and Treasury bond futures contracts with the intent to cancel those orders prior to execution.
That's the definition of a spoof trade. [1]
> Spoofing is a form of market manipulation in which a trader places one or more highly-visible orders but has no intention of keeping them.
