February 8, 2013

CFTC Sanctions Gelber Group, LLC $750,000 for Trading Abuses on Two Exchanges

Gelber falsely reported orders that caused non-bona fide prices to be included in the indicative opening price in the Chicago Mercantile Exchange’s NASDAQ E-mini 100 futures contract and engaged in wash sales

Separately, former Gelber trading manager Martin A. Lorenzen ordered to pay $200,000 for engaging in illegal wash sales

Washington DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing and simultaneous settlement of charges against Gelber Group, LLC (Gelber) of Chicago, Ill., for reporting orders during pre-opening trading sessions that Gelber had no intention of executing. The CFTC also settled charges against both Gelber and former Gelber trading manager Martin A. Lorenzen for engaging in wash sales. The CFTC Orders require Gelber and Lorenzen to pay a civil monetary penalty of $750,000 and $200,000, respectively, and order the Respondents to cease and desist from violating the Commodity Exchange Act (CEA) and CFTC regulation 1.38, as charged.

Gelber’s False Reports of Orders in the Pre-Open Session

The CFTC Order against Gelber finds that from at least August 20, 2009 to February 16, 2010, a Gelber proprietary trader reported false orders in the pre-opening session of the NASDAQ E-mini 100 futures contract on the Chicago Mercantile Exchange’s (CME) Globex electronic trading platform. The orders were false because they were not intended to be executed and, in fact, were cancelled before the market opened. These orders caused non-bona fide prices in the indicative opening price (IOP) for the NASDAQ E-mini 100 futures contract, which is the price at which the contract is expected to trade at the opening of trading. The CME broadcasts the IOP to other Globex users and to publishers of financial data who purchase and disseminate the IOP information to the public. Gelber violated provisions of the CEA that prohibit false reporting and causing non-bona fide prices to be reported, registered, or recorded.

Gelber and Lorenzen’s Illegal Wash Sales

The CFTC Orders also separately find that at least between March 2010 and August 2010, two Gelber proprietary traders engaged in wash sales in certain Russell Index futures contracts at the direction of their manager, Lorenzen, in order to inflate Gelber’s trading volumes and enable it to obtain increased rebates from the IntercontinentalExchange (ICE) as part of an ICE incentive program, the Russell Member Fee Program.

Under the terms of the incentive program, ICE agreed to rebate fees to traders on all Russell Index futures contracts (including the actively traded Russell 2000 futures contract) if the program participant traded pre-determined volumes of contracts in some thinly traded Russell 1000 Index contracts on a monthly basis – specifically, the Russell 1000 Index Mini, the Russell 1000 Growth Index and the Russell 1000 Value Index futures contracts (Russell 1000 contracts), according to the Orders.

In early 2010, the Gelber executive who arranged Gelber’s participation in the incentive program asked Lorenzen to select two traders to trade the Russell 1000 contracts and provided them with the specific volumes of contracts they had to trade to make Gelber eligible for the rebates. The two traders had difficulty trading the necessary volume profitably because of the thinness of the Russell 1000 market. Lorenzen, therefore, resorted to instructing them to engage in unlawful wash sales and trade opposite each other until they reached the necessary volume. Moreover, rather than rely solely on manual wash sales to get the rebates, Lorenzen directed a Gelber programmer to create a computer program that would automatically enter matching orders from each trader’s computer. The two traders used the computer program each month during the relevant period and executed wash sales repeatedly in the Russell 1000 contracts, according to the orders.

CFTC Division of Enforcement staff responsible for this matter are David Terrell, Heather Johnson, Joseph Konizeski, Scott R. Williamson, Rosemary Hollinger, and Richard Wagner.

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Dennis Holden
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Last Updated: February 8, 2013