Ethics Case Study of the Week: Spoofing the Market

By Gary Sarkissian posted 08-30-2021 08:00


CFA Institute’s Code of Ethics and Standards of Professional Conduct codify the ethical guidelines for the investment profession that are critical to maintaining the integrity of capital markets and investor trust.  Members, candidates, and even firms make a commitment to uphold these standards as they help elevate ethical decision-making universally around the globe. 

As investment professionals, we are certain to face important ethical decisions in our day-to-day activities.  Some scenarios we encounter will be straightforward, while others may be more complex.  No matter what circumstances we face, continuous learning remains imperative in an investment industry that continues to evolve with products undergoing innovation and a regulatory environment continuing to adapt. 

For that reason, each week we feature a sample case from CFA Institute’s Ethics in Practice Casebook.  Many cases are built upon real-life examples that may involve a regulatory matter or even a CFA Institute Professional Conduct investigation.  At the end of each case is a multiple-choice question that addresses the ethical nature of the actions taken in that case.  

This week’s case involves Standard II(B) Market Manipulation.

Spoofing the Market
Antron is a commodities trader for a regional bank. He often places customer orders for precious metal
futures contracts. Then shortly after placing a customer order, he will place a significantly larger order on the other side of the trade for his personal account. So for example, when a customer order is a “sell” order, Antron places a much larger “buy” order from his personal account. Typically, Antron’s orders for his personal account are placed slightly lower than best price, reducing the likelihood of his order being filled immediately. As soon as the customer order is executed, Antron cancels his personal trade order.  Antron’s actions are

A. unacceptable.
B. acceptable because his clients’ trades are always executed prior to his personal trades.
C. acceptable if he discloses that he is engaging in a trading strategy for his personal account that is opposite that of his client account.
D. acceptable because he is acting in the best interests of his clients.
E. none of the above.

What do you think is the correct choice?  Click the “Analysis” button below to see the analysis for this case, and feel free to discuss in the comments below.  The completion of this case qualifies for 0.25 hour of Standards, Ethics, and Regulation (SER) credit

Antron is engaged in a market manipulation scheme in violation of CFA Institute Standard II(B): Market Manipulation, which prohibits CFA Institute members from engaging in practices that distort prices with the intent to mislead the market. By trading in this manner, Antron is engaging in the practice of “spoofing”: His personal orders, which he routinely cancels, are fake or spoof orders entered with the intent to send false signals to market participants. So for example, by placing spoof orders to buy, Antron sends market participants a false signal of greater demand, creating the impression that the price would likely rise and tricking market participants into executing against his genuine customers’ orders to sell. This causes his customers’ genuine sell orders to be filled sooner, at a better price, or in larger quantities than might otherwise occur. (The risk that the spoof orders could mislead other market participants into believing there was genuine interest in purchasing or selling the specified number of contracts represented by Antron’s spoof orders was so obvious that Antron must have been aware of it.)

Although Antron’s spoofing practice is boosting returns for his clients’ trades, he is doing so at the expense of the integrity of the market. The order of trading between client orders and those for his personal account is irrelevant. In fact, his personal trades are never executed—an integral part of the spoofing scheme. And because Antron is not following a legitimate trading strategy, disclosure of his strategy to his clients does not legitimize or permit his market manipulation scheme. Choice A is the best answer.

This case is based on a US Commodities Futures Trading Commission enforcement action from February 2019.

Image by Steve Bidmead from Pixabay

© 2019 CFA Institute. All rights reserved. You may copy and distribute this content, without modification and for non-commercial purposes, provided you attribute the content to CFA Institute and retain this copyright notice.  This case was written as a basis for discussion and is not prescriptive of how a business situation or professional conduct matter should or should not be handled or addressed. Certain characters mentioned are fictional to facilitate discussion, and any resemblance to actual persons is coincidental.