Recent court cases involving Navinder Sarao and Mike Corscia - along with Barclays $150 million spoofing fine - are very clear examples of a system refusing to react to manipulations even when they have the tools available to do so.
Head of CME Terry Duffy said: "We need to get the facts from the case. This is a first trial-by-jury-case."
Exchanges now have to apply the rules and Mr Duffy as an ex-trader is well aware what constitutes cheating. The argument here appears to be that 60% of CME volume is HFT and in this jury's verdict, they are stating that exchanges have failed by allowing spoofing
and other manipulative trades.
SPOOFING occurs when a trader places orders in markets without the intention to execute them, as part of a scheme to create the illusion of demand. (Exchanges refer to this as "liquidity"). The rules outlawing such behaviour have been around for decades,
but the exchanges appear to have mislaid them. Imagine the same situation happening in football: A player handles the ball in the penalty area and the referee does not award a penalty kick until three years later - impossible,
isn't it? Because in football the ref immediately reacts and his decision benefits all the teams playing . The referee's real-time supervision is vital to having a fair game. However Sarao and Corscia have consistently cheated and abused our markets right
in front of the exchanges' supervisory departments - only to be pulled up years later! Their fines are delivered and paid, yet those who have been penalised by playing by the rules are totally ignored, with zero apologies or compensation offered.
The exchange on the other hand benefits from added liquidity, volume and open interest - at the same time increasing their profits. The regulator benefits from the fines to pay for new tools and better staff. The counterparty trader however is the loser, with
only the scant consolation of seeing the guilty party punished years later. Absurd!
Exchanges' depth of market screens provide clear access to a multitude of spoofing ploys to the trained eye, yet it appears their supervisory departments are blocked from intervening by the exchange sales teams. They have the tools to remove guilty traders
from the market place and suspend rogue traders' activities. The only reason I believe they don't is that the guilty party is either a high volume trader or a market maker; Barclays fits this description perfectly. Until our exchanges manage in real-time
and allow their supervision departments totally free access and sufficient clout, we cannot hope for "fair and orderly markets" to return .