In 2011, a junior Tokyo-based Citigroup trader flew halfway across the world to visit Citigroup’s Manhattan headquarters for initiation into the mysteries of trading U.S. Treasury futures. It was a big moment for the young guy, giving him the chance to watch the big bank’s old hands work their magic in the deepest and most liquid securities market in the world. His eyes lit up with the reflections of figures flitting across trading terminals before him, probably, as his mentors demonstrated how they made it rain. What he learned that day can be summarized in a word: Spoofing.
That’s the story from the Commodity Futures Trading Commission, which on Thursday fined Citigroup $25 million over more than 2,500 instances it found between 2011 and 2012 of Citigroup Treasury traders placing large orders with the intent of immediately cancelling them. In other words Citi was spoofing, which, depending on your creed and professional standing, is either bad, merely illegal, or both.
In Citi’s case, traders would regularly bids or offers of at least 1,000 lots, swaying spreads one way or another, the CFTC says. As other market participants (read: algorithms) shifted their trades accordingly, Citi’s traders allegedly filled smaller resting orders opposite of their spoofs. Then they would cancel the fake orders, rinse and repeat.
Though one can find perfectly respectable arguments out there that spoofing amounts to a hill of beans, regulators are not terribly fond of it. It was spoofing, remember, that caused the flash crash (maybe). “Spoofing is a significant threat to market integrity,” the CFTC’s enforcement guy said. “Registrants with supervisory responsibilities must provide their employees with sufficient training and have in place adequate systems and controls to detect spoofing.”
From the CFTC’s point of view, a training program that literally taught junior bankers how to spoof, as the CFTC’s enforcement order alleges, is hardly kosher. Incidentally, our young Japanese trader might feel similarly about the sufficiency of his training, though for different reasons.
After returning from the Citigroup mothership, where he “observed two of the Traders place spoofing orders,” the Tokyo trader commenced to put his newfound skills into action, the order says. But apparently Citi’s instructions weren’t clear enough. On January 31, 2012, he placed a 4,000-lot offer for 10-year futures, expecting to cancel it once it had shifted prices sufficiently to trade on a smaller resting bid.
That’s when things went horribly wrong. “The majority of his 4,000 lot spoofing order traded before he could cancel the order,” the CFTC documents said. This meant a loss big enough for our young trader to have to report his spoof error to Citi higher-ups, including the head of the Treasury desk.
His punishment came swiftly and remorselessly. His supervisor told him, “That's not a smart thing to do” and warned him not to do it again, according to the CFTC.
What really cheesed off the regulators, though, was that Citi's Treasury desk head failed to inform compliance or other senior staff about the Tokyo whiff. It’s not hard to see why they were loath to report it – not only did Citi’s traders instruct their Tokyo colleague how to spoof in the first place (allegedly), they did a bad job at even that. If you’re going to teach someone to break the rules, you should at least teach them well.
Citigroup neither confirmed nor denied that the existence of their mediocre spoofing academy.