Regulators have delivered a blunt warning to banks to clamp down on high-speed financial market manipulation or risk blockbuster fines and criminal convictions for staff.
US authorities this week levied a $920m fine on JPMorgan Chase for eight years of giving a false impression of market demand in precious metals and US government bonds by rapidly entering and cancelling orders — a practice known as spoofing. The penalty far outstrips previous punishments for such misconduct.
The size of the fine reflects regulators’ dissatisfaction with JPMorgan, one of the world’s largest financial institutions. But the settlement has also sent a message that spoofing is as serious a liability to banks as rate-rigging, corruption or money-laundering scandals.
“There aren’t that many cases in the white-collar world that would warrant total penalties in these amounts,” said James McDonald, enforcement director at US regulator the Commodity Futures Trading Commission. The size of the fine “reflects the scope and breadth of the conduct that’s at issue”, he said.
Regulators outlawed spoofing 10 years ago, and have long sought to punish underhand trading tactics in an era when the anonymity and digitisation of modern markets has provided fertile ground for misconduct.
The highest-profile criminal capture was the independent trader Navinder Singh Sarao, the “Hound of Hounslow”, who admitted to spoofing the US futures markets for years, including the day of the 2010 market “flash crash”.
Even so, watchdogs have been frustrated they could not do more to clamp down on financial institutions, which they felt were not taking the law seriously. In 2013, the CFTC closed an investigation into possible manipulation of the silver markets, involving JPMorgan, saying it did not have enough evidence to bring a case.
This week’s settlement revealed that the bank’s traders continued to spoof precious metals and Treasury markets until 2016, even while the bank paid multimillion-dollar penalties to settle charges of manipulating California electricity markets and currencies.
Tyler Gellasch, executive director of Healthy Markets, a lobby group and a former regulator, said the size of the fine reflected JPMorgan’s status. But he added that poor behaviour in the US Treasuries market, where more than $500bn of debt trades every day, proved to be a wake-up call for authorities. This is one of the world’s most important markets, providing the benchmark for pricing other securities while also serving as a haven in times of stress. “They realised: ‘If people can manipulate the Treasuries market, people can manipulate anything’,” Mr Gellasch said.
The landscape shifted dramatically in the past week as regulators closed in. A Chicago court found two former Deutsche Bank traders guilty of multiple counts of spoofing, between 2008 and 2013. The traders face a maximum of 30 years in jail, though sentences for white-collar defendants are typically significantly lower. Both men are set to appeal their convictions.
In Tuesday’s settlement, US authorities criticised JPMorgan for failing to fully co-operate at the outset of their inquiries. The Department of Justice noted that the bank began suspending suspected traders on its metals desk only after a second person had pleaded guilty.
Two former JPMorgan traders were last year accused of lying to the CFTC in the 2013 investigation as part of a racketeering indictment centred on spoofing conduct that includes a third former trader and a former JPMorgan salesperson. They have denied the charges and are awaiting trial.
Mr McDonald at the CFTC said the agency had become more skilled in bringing spoofing cases over time, using more data analytics and working closely with the DoJ, which has authority to conduct criminal investigations.
Collectively, the punishments should be a warning, said David Hesketh, co-founder of TradingHub, a UK software company that sells regulatory compliance products to financial institutions. “This scale of fine should be terrifying at board level,” he said.
JPMorgan said it has spent more than $430m recruiting hundreds of new compliance officers and increasing its internal audit budget, following its fine for manipulating currencies markets in 2015. It has also upgraded its surveillance of trading and communication technology.
Huge fines are only partial deterrents. JPMorgan remains critical to the world’s financial system, keeping the money flowing for lending and trading.
“Is it going to do anything to the CEO’s or bank’s reputation? No. Are the counterparties going to stop working with you? I’m not sure . . . The classic idea that if I don’t like Chipotle I’ll eat somewhere else doesn’t work in the banking world. The expertise isn’t easy to find,” said Shiva Rajgopal, an accounting and audit professor at Columbia Business School.
But the potential reputational damage may be enough.
“I don’t think that most people at this point think that spoofing is to be taken lightly,” said Aitan Goelman, a former CFTC enforcement director. “If they believe that, they haven’t been paying close attention.”