June 28, 2019

CFTC Orders Commodity Trading Firm to Pay Penalty for Wash Sales and Improve its Internal Controls

Washington, DC – The Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Respondent, Eagle Market Makers, Inc. (Eagle), an Illinois firm, for engaging in wash sales and noncompetitive transactions which were traded on the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange, Inc. (collectively, CME).  The Order requires Eagle to pay a $350,000 civil monetary penalty and implement and improve its internal controls and procedures.

James McDonald, the Director of Enforcement, stated: “As today’s action shows, the CFTC will work tirelessly to ensure that the derivatives markets remain open and competitive, and are not undermined by unlawful wash sales and noncompetitive trading.  This case should stand as a reminder that the Commission will continue to closely monitor trading activity in our markets for all varieties of misconduct.”

According to the Order, from in or about February 2015 to February 2019, Eagle, through certain traders, entered bids and offers of similar quantities in the same futures contract for Eagle’s proprietary trading accounts which were intended to and did in fact offset each other upon execution.  These future trades involved corn, soybean, soybean oil, soybean meal, wheat and Eurodollar futures contracts.   According to the Order, a subsequent offsetting bid was typically entered and priced higher than its original resting offer and/or a subsequent offsetting offer was similarly entered and priced lower than its original resting bid (Offsetting Orders).

Specifically, the Order finds that in each instance, Eagle Traders entered an original bid and/or offer and a subsequent Offsetting Order during the pre-trading period, also known as the pre-opening period (Pre-Open).  The Pre-Open is a predetermined period of time before the next trading session opens when orders generally can be entered, modified and cancelled, but no trades can be executed, according to the Order.  During the Pre-Open, however, there is a defined period of time called the “No-Cancel” or “Lockdown” when orders may only be entered but cannot be canceled or modified (Lockdown Period) and that the Lockdown Period typically is the last 30 seconds of the Pre-Open, the Order states. 

The Order finds that in each instance, Eagle entered their bids and offers during the Pre-Open and then, due to a change in market conditions, no longer wanted to have these bids and offers executed as entered.  However, since the market conditions typically changed during the Lockdown Period, the Lockdown rules prevented them from modifying or canceling their original bids and offers.  As a result, the Eagle Traders entered their Offsetting Orders during the Lockdown Period to offset their original bids and offers.  Immediately after the market opened, the Offsetting Orders offset the original bids and offers.  By this conduct, the Order concludes, Eagle intended to and did negate market risk or price competition and engaged in wash sales that were noncompetitive transactions.

In addition to imposing the $350,000 civil monetary penalty, the Order requires Eagle to cease and desist from further violations of the Commodity Exchange Act and CFTC Regulations, as charged, and to undertake to implement and improve its internal controls and procedures in a manner reasonably designed to ensure compliance with applicable prohibitions on wash sales and non-competitive trading.

The CFTC’s investigation was conducted in conjunction with a parallel inquiry by the CME.  Today, the CME issued a Notice of Disciplinary Action in which Eagle agreed to pay a fine of $150,000 arising out of the wash trades and noncompetitive transactions that are the subject of the CFTC’s Order.  In imposing its civil monetary penalty, the CFTC took into account the fine imposed by the CME in its related action. 

The CFTC thanks the CME for its assistance. 

CFTC Division of Enforcement staff members responsible for this action are Janine Gargiulo, Michael Cazakoff, Steven Ringer, Lenel Hickson and Manal Sultan.