- JP Morgan Chase was found engaged in placing manipulative trades in the secondary market
- According to Commodity Futures Trading Commission, JPMorgan has carried out several spoof trades to influence the price of asset and deceive investors.
- The penal action would set an example for the traders who are engaged in manipulative and deceptive trade practices.
One of the largest banks in the United States, JP Morgan Chase was found engaged in placing manipulative trades in the secondary market, which consists of futures tied to precious metals and Treasury bonds. JP Morgan has been asked to pay a fine of $920 million to settle the charges.
US largest bank, JP Morgan used “spoof trades”, which meant hundreds of thousands of non-bona fide orders that were placed and quickly cancelled to manipulate the pricing of the asset from 2008 to 2016, over a period of at least eight years to deceive investors. According to Commodity Futures Trading Commission (CFTC), JPMorgan has carried out several spoof trades to influence the price of asset and deceive investors.
Traders can influence the prices of assets by creating false demand for the asset by placing spoof trades. For instance, a large number of trade orders can indicate good amount of liquidity and can misguide potential investors.
The penalising of the JP Morgan would set an example for the traders who are engaged in manipulative and deceptive trade practices. Placing spoof trades is unethical and illegal. CFTC has stated that it is committed to act against entities which deliberately flout the rules.
According to the US Securities and Exchange Commission, JP Morgan has deliberately undermined the integrity of the markets. However, JP Morgan claims that the traders no longer work for the company as these violations took place between 2008 and 2016.
Spoofing not one-off incident for JPMorgan
In another shocking incident, which took place a year ago, JPMorgan Chase gold traders were found manipulating prices in the precious metals’ markets by the Department of Justice. These kinds of malpractices not only dilute the brand equity of the company but also penalises the shareholders of the company; instead of top executives or other employees, who were directly involved in this malicious activity.
The landmark settlement is a huge achievement for the regulatory authorities to clamp down on illegal trading practices that are prevalent in the futures and metals market. For established assets such as shares, spoofing has been made illegal and is prosecuted in many jurisdictions.
From the perspective of JP Morgan investors, the largest bank of US might undergo a huge reputational loss. This could even spill the disaster on the share price movement of the stock. The traders involved must be penalised for the crime rather than the investors and the other stakeholders. Notably, JP Morgan has kept US$ 8.3 billion to hedge against Covid-19 impact.
How does spoofing works?
Let us assume Mr X is a professional trader who buys and sells Company Y shares through a broker’s website. Brokers essentially put buyers and sellers together. Buyers submit the prices at which they are willing to buy or buy orders whereas sellers submit the prices at which they are willing to sell or sell orders. Like the buyers & sellers who use the broker’s website, Mr X sees the so-called order book that is displayed publicly.
As the name suggests, an order book is basically a list of buy as well as sell orders for a certain asset where market participants can see how much demand is there from buyers and how much supply sellers are willing to offer at various level of prices. Order books can be great because they facilitate transparency with some traders even making decisions based on order book data. Unfortunately, spoofers have tossed the idea of order books as they can be manipulated easily. The order book concept was introduced to provide transparency. Mr X decides to manipulate the order books. Let us understand how?
If Mr X want other traders to think there is more demand than there actually is because he hopes this would convince them to buy, he creates large buy orders that he does not intend to keep and instead removes them as soon as the current price gets close.
If Mr X wants traders to think there is more on the supply side than in reality and hope that it will make prices go down, he does the opposite and creates fake sell orders. This can be done manually but nowadays with advancement of automation and other technologies; traders tend to deploy complex algorithms and this practice itself is called spoofing.
There is a need for better legislations
The Dodd-Frank act, which was enacted in 2010, was created after the Financial crisis of 2008. The legislation was targeted at the constituents of the financial system which triggered the collapse of the sector and triggered the financial crisis of 2008.
After the landmark decision, the regulatory bodies need to bolster the existing compliance and regulatory framework eradicate these sorts of malpractices to protect the interest of investors and other stakeholders.
As of now, for less established assets such as cryptocurrencies, the prosecution dimension tends to be trickier and as a result spoofer are less afraid to carry out malpractices. Companies dealing in cryptocurrencies are registered in different jurisdictions and therefore it is difficult to regulate the less established currencies. However, for established assets such as shares, spoofing has been made illegal and is prosecuted in many jurisdictions.