Antidisruptive Practices Authority, 14943-14948 [2011-6398]

Download as PDF Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices 14943 Deletions On 1/21/2011 (76 FR 3879–3880), the Committee for Purchase From People Who Are Blind or Severely Disabled published notice of proposed deletions from the Procurement List. After consideration of the relevant matter presented, the Committee has determined that the products and service listed below are no longer suitable for procurement by the Federal Government under 41 U.S.C. 46–48c and 41 CFR 51–2.4. agency employing persons who are blind or have other severe disabilities. Comments Must Be Received on or Before: 4/18/2011. ADDRESSES: Committee for Purchase From People Who Are Blind or Severely Disabled, Jefferson Plaza 2, Suite 10800, 1421 Jefferson Davis Highway, Arlington, Virginia 22202–3259. NPA: Industries for the Blind, Inc., West Allis, WI. Contracting Activity: Military ResaleDefense Commissary Agency, Fort Lee, VA. Coverage: C–List for the requirements of military commissaries and exchanges as aggregated by the Defense Commissary Agency. FOR FURTHER INFORMATION OR TO SUBMIT COMMENTS CONTACT: Barry S. Lineback, Regulatory Flexibility Act Certification I certify that the following action will not have a significant impact on a substantial number of small entities. The major factors considered for this certification were: 1. The action will not result in additional reporting, recordkeeping or other compliance requirements for small entities. 2. The action may result in authorizing small entities to furnish the products and service to the Government. 3. There are no known regulatory alternatives which would accomplish the objectives of the Javits-Wagner-O’Day Act (41 U.S.C. 46–48c) in connection with the products and service deleted from the Procurement List. Telephone: (703) 603–7740, Fax: (703) 603–0655, or e-mail CMTEFedReg@AbilityOne.gov. Barry S. Lineback, Director, Business Operations. End of Certification Accordingly, the following products and service are deleted from the Procurement List: Products Floor Care Products NSN: 7930–01–486–4050 NSN: 7930–01–486–5928 NSN: 7930–01–486–5930 NPA: Lighthouse for the Blind of Houston, Houston, TX. Contracting Activity: General Services Administration, Fort Worth, TX. Service Service Type/Location: Laundry Service, Atlanta VA Medical Center, Decatur, GA. NPA: GINFL Services, Inc., Jacksonville, FL. Contracting Activity: Department of Veterans Affairs, VISN 7 Consolidated Contracting, Augusta, GA. Barry S. Lineback, Director, Business Operations. [FR Doc. 2011–6422 Filed 3–17–11; 8:45 am] BILLING CODE 6353–01–P COMMITTEE FOR PURCHASE FROM PEOPLE WHO ARE BLIND OR SEVERELY DISABLED Emcdonald on DSK2BSOYB1PROD with NOTICES Procurement List; Proposed Additions Committee for Purchase From People Who Are Blind or Severely Disabled. ACTION: Proposed Additions to the Procurement List. AGENCY: The Committee is proposing to add products to the Procurement List that will be furnished by a nonprofit SUMMARY: VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 This notice is published pursuant to 41 U.S.C. 47(a)(2) and 41 CFR 51–2.3. Its purpose is to provide interested persons an opportunity to submit comments on the proposed actions. [FR Doc. 2011–6421 Filed 3–17–11; 8:45 am] BILLING CODE 6353–01–P SUPPLEMENTARY INFORMATION: If the Committee approves the proposed additions, the entities of the Federal Government identified in this notice will be required to procure the products listed below from a nonprofit agency employing persons who are blind or have other severe disabilities. Regulatory Flexibility Act Certification I certify that the following action will not have a significant impact on a substantial number of small entities. The major factors considered for this certification were: 1. If approved, the action will not result in any additional reporting, recordkeeping or other compliance requirements for small entities other than the small organization that will furnish the products to the Government. 2. If approved, the action will result in authorizing small entities to furnish the products to the Government. 3. There are no known regulatory alternatives which would accomplish the objectives of the Javits-WagnerO’Day Act (41 U.S.C. 46–48c) in connection with the products proposed for addition to the Procurement List. Comments on this certification are invited. Commenters should identify the statement(s) underlying the certification on which they are providing additional information. End of Certification The following products are proposed for addition to Procurement List for production by the nonprofit agency listed: Products NSN: MR 899—Slicer, Pineapple, Stainless NSN: MR 1135—Set, Spreader, 4Pc NSN: MR 1136—Mug, Seasonal Frm 00050 Antidisruptive Practices Authority Commodity Futures Trading Commission. ACTION: Proposed Interpretive Order. AGENCY: Additions PO 00000 COMMODITY FUTURES TRADING COMMISSION Fmt 4703 Sfmt 4703 The Commodity Futures Trading Commission (‘‘Commission’’ or ‘‘CFTC’’) is proposing this interpretive order to provide interpretive guidance regarding the three statutory disruptive practices set forth in new section 4c(a)(5) of the Commodity Exchange Act (‘‘CEA’’) pursuant to section 747 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’). The Commission requests comment on all aspects of the proposed interpretive order. DATES: Comments must be received on or before May 17, 2011. ADDRESSES: Comments, identified by RIN number, may be sent by any of the following methods: • Agency Web site, via its Comments Online process: https:// comments.cftc.gov. Follow the instructions for submitting comments through the Web site. • Mail: David A. Stawick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. • Hand Delivery/Courier: Same as mail above. • Federal eRulemaking Portal: https:// www.regulations.gov. Follow the instructions for submitting comments. FOR FURTHER INFORMATION CONTACT: Robert Pease, Counsel to the Director of Enforcement, 202–418–5863, rpease@cftc.gov; Steven E. Seitz, Attorney, Office of the General Counsel, 202–418–5615, sseitz@cftc.gov; or Mark D. Higgins, Counsel to the Director of Enforcement, 202–418–5864, mhiggins@cftc.gov, Commodity Futures Trading Commission, Three Lafayette SUMMARY: E:\FR\FM\18MRN1.SGM 18MRN1 14944 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices Centre, 1151 21st Street, NW., Washington, DC 20581. All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to https:// www.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that may be exempt from disclosure under the Freedom of Information Act (‘‘FOIA’’),1 a petition for confidential treatment of the exempt information may be submitted according to the established procedures in § 145.9 of the CFTC’s regulations.2 The Commission reserves the right, but shall have no obligation, to review, prescreen filter, redact, refuse, or remove any or all of your submission from https:// www.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under FOIA. SUPPLEMENTARY INFORMATION: Prohibition of Disruptive Practices I. Statutory and Regulatory Authorities On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’).3 Title VII of the Dodd-Frank Act 4 amended the Commodity Exchange Act (‘‘CEA’’) 5 to establish a comprehensive new regulatory framework for swaps and security-based swaps. The legislation was enacted to reduce risk, increase transparency, and promote market integrity within the financial system by, among other things: (1) Providing for the registration and comprehensive regulation of swap dealers and major swap participants; (2) imposing clearing and trade execution requirements on standardized derivative products; (3) creating robust recordkeeping and realtime reporting regimes; and (4) enhancing the Commission’s rulemaking and enforcement authorities Emcdonald on DSK2BSOYB1PROD with NOTICES 15 U.S.C. 552. CFR 145.9. 3 See Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Public Law 111– 203, 124 Stat. 1376 (2010). The text of the DoddFrank Act may be accessed at https://www.cftc.gov./ LawRegulation/OTCDERIVATIVES/index.htm. 4 Pursuant to section 701 of the Dodd-Frank Act, Title VII may be cited as the ‘‘Wall Street Transparency and Accountability Act of 2010.’’ 5 7 U.S.C. 1 et seq. 2 17 VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 with respect to, among others, all registered entities and intermediaries subject to the Commission’s oversight. Section 747 of the Dodd-Frank Act amends section 4c(a) of the CEA to add a new section entitled ‘‘Disruptive Practices.’’ New CEA section 4c(a)(5) makes it unlawful for any person to engage in any trading, practice, or conduct on or subject to the rules of a registered entity that— (A) Violates bids or offers; (B) Demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or (C) Is, is of the character of, or is commonly known to the trade as, ‘‘spoofing’’ (bidding or offering with the intent to cancel the bid or offer before execution). Dodd-Frank Act section 747 also amends section 4c(a) by granting the Commission authority under new CEA section 4c(a)(6) to promulgate such ‘‘rules and regulations as, in the judgment of the Commission, are reasonably necessary to prohibit the trading practices’’ enumerated therein ‘‘and any other trading practice that is disruptive of fair and equitable trading.’’ The Commission is issuing this proposed interpretive order to provide market participants and the public with guidance on the scope of the statutory prohibitions set forth in section 4c(a)(5). The Commission requests comment on all aspects of this proposed interpretive order, as well as comment on the specific provisions and issues highlighted below. II. Background On November 2, 2010, the Commission issued an advance notice of proposed rulemaking (‘‘ANPR’’) asking for public comment on all aspects of Dodd-Frank Act section 747.6 When the ANPR was issued, the Commission was considering whether to adopt regulations regarding the disruptive practices set forth in new CEA section 4c(a)(5). After reviewing the ANPR comments, the Commission determined that it was appropriate to address the statutory disruptive practices through a proposed interpretive order. Accordingly, a Commission document terminating the ANPR is being published elsewhere in the Proposed Rules section of this issue of the Federal Register. Notwithstanding that termination, the Commission considered all of the ANPR commentary in developing this proposed interpretive order. 6 75 PO 00000 FR 67301, Nov. 2, 2010. Frm 00051 Fmt 4703 Sfmt 4703 In the ANPR, commenters were encouraged to address the nineteen specific questions posed by the Commission in the ANPR.7 The ANPR requested, among other things, comment on section 747(A) (‘‘violating bids and offers’’), section 747(B) (‘‘the disorderly execution of transactions around the closing period’’), section 747(C) (‘‘spoofing’’), the role of executing brokers, and the regulation of algorithmic and automated trading systems.8 The questions in the ANPR also formed the basis for a December 2, 2010, roundtable held by Commission staff in Washington, DC.9 The full-day roundtable consisted of three panels 10 that addressed the ANPR questions, the role of exchanges in CFTC-regulated markets, and whether there are other potential disruptive trading practices that the Commission should prohibit. The ANPR set a deadline of January 3, 2011, by which comments had to be submitted.11 In response to the ANPR, the Commission received 28 comments from interested parties,12 including industry members, trade associations, consumer groups, exchanges, one member of the U.S. Congress, and other interested members of the public.13 The Commission has carefully considered all of the ANPR comments, as well as the roundtable discussion, in proposing this interpretive order. Throughout the roundtable discussion and comment letters, there was widespread support for the Commission’s goal of preventing disruptive trading practices and ensuring fair and equitable markets.14 Several themes emerged from the roundtable discussion and the comment 7 The ANPR may be accessed through: https:// comments.cftc.gov/PublicComments/ CommentList.aspx?id=893. 8 75 FR 67302, Nov. 2, 2010. 9 See Appendix III for a list of roundtable participants and discussion panels. A verbatim transcript of the disruptive trading practices roundtable may be accessed at https://www.cftc.gov/ ucm/groups/public/@swaps/documents/ dfsubmission/dfsubmission24_120210-transcri.pdf. 10 Note that citations to statements by the panelists at the public roundtable will be cited as [Panelist name at page X of roundtable transcript]. 11 75 FR 67301, Nov. 2, 2010. 12 See Appendix IV for a list of parties submitting comment letters in response to the ANPR. 13 The comment letters received by the Commission in response to the ANPR may be accessed through: https://comments.cftc.gov/ PublicComments/CommentList.aspx?id=893. 14 Liam Connell at 40 (‘‘Allston Trading supports the mission of the CFTC to maintain orderly markets and to prohibit deceptive practices and manipulative trading.’’); Rajiv Fernando at 17 (‘‘I support the CFTC’s effort to ensure that markets operate in an orderly way that’s fair for all participants.’’); Argus at 1 (‘‘Argus supports the important goal of preventing disruptive trade practices in CFTC jurisdictional markets.’’). E:\FR\FM\18MRN1.SGM 18MRN1 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices letters, which are discussed below in the following sections. a. Market Participants Request Additional Guidance Regarding the Scope and Application of Section 747’s Provisions Throughout the Commission roundtable, panelists stated that the provisions of section 747 were vague 15 and did not provide market participants with adequate notice of the type of trading, practices, and conduct that is prohibited by section 4c(a)(5).16 Several comment letters also raised concerns about vagueness and believed that Dodd-Frank Section 747 was susceptible to constitutional challenge.17 Comment letters requested that the Commission provide additional guidance concerning the conduct and trading practices that constitute violations under the statute.18 During the roundtable discussion, panelists also requested additional clarity and refinement in the definition of terms such as ‘‘the orderly execution of transactions,’’ 19 ‘‘closing period,’’ 20 and ‘‘spoofing.’’ 21 The comment letters reiterated this concern and expressed the need for the Commission to define these terms and other concepts such as violating bids and offers.22 Emcdonald on DSK2BSOYB1PROD with NOTICES 15 See. e.g., Gary DeWaal at 57 (‘‘This is an incredibly vague provision.’’); Greg Mocek at 170 (‘‘There are a lot of issues on vagueness.’’). 16 See, e.g., Adam Nunes at 20 (‘‘Additional guidance * * * is going to be necessary.’’); Ike Gibbs at 157 (‘‘We would really prefer to see a scenario where the Commission is not overly prescriptive [and] we’re given guidance as to what’s appropriate and what’s not appropriate.’’). 17 See, e.g., Managed Funds Association at 4 (‘‘Dodd-Frank Act Section 747 as written is vague and particularly vulnerable to constitutional challenge by market participants.’’); CME Group at 2 (‘‘As written, Section 747 is vague and susceptible to constitutional challenge.’’). 18 See, e.g., American Petroleum Institute at 2 (‘‘The Commission should provide specific guidance regarding the scope of the trading practices listed in 747.’’); Investment Company Institute at 2 (Recommending that the ‘‘Commission provide additional guidance as to the types of conduct that would constitute violations under the statute.’’); HETCO at 4 (‘‘The Commission should resolve the ambiguity in Section 4c(a)(5) by articulating the specific types of disruptive practices that prompted it to request the new enforcement authority in Section 747.’’). 19 See, e.g., Adam Nunes at 26 (‘‘When we look at disruptive trading practices and the intentional reckless disregard for orderly execution that is going to be very difficult to define.’’). 20 See, e.g., Don Wilson at 46 (‘‘The definition of those rules around what is and is not acceptable in the closing period needs to be carefully considered.’’). 21 See, e.g., Gary DeWaal at 64 (‘‘I’m not sure the definition of spoofing can be agreed upon by the ten people around this table.’’); John J. Lothian at 82 (Referring to ‘spoofing’ as a ‘‘very undefined type of term within the industry.’’). 22 See, e.g., Futures Industry Association at 3 (‘‘Definitions such as ‘orderly execution,’ ‘violates bids or offers’ and ‘spoofing’ in Sections 4c(a)(5)(A), VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 Panelists and commenters also sought clarity on whether scienter is required for each of the enumerated practices of section 4c(a)(5), and if so, specificity as to the degree of intent required. Roundtable panelists 23 and commenters 24 stated that a showing of bad intent should be necessary to distinguish prohibited conduct from legitimate trading activities. Panelists further stressed that any evaluation of trading behavior must consider the historical trading patterns and practices of market participants.25 In response to these comments, the Commission is proposing this Interpretive Order to provide additional guidance to market participants and the public on the types of trading, conduct, and practices that will constitute violations of section 4c(a)(5). This proposed interpretive order addresses the concerns expressed by the commenters regarding market uncertainty by clarifying how the Commission will interpret and implement the provisions of section 4c(a)(5). By the terms of the statute, 4c(a)(5) applies to trading, practices or conduct on or subject to the rules of a registered entity: a designated contract market or a swap execution facility (‘‘SEF’’).26 The Commission interprets that section 4c(a)(5) will not apply to block trades or exchanges for related positions (‘‘EFRPs’’) transacted in accordance with the rules of a designated contract market or SEF or bilaterally negotiated swap transactions. The Commission stresses the important role and unique position of exchanges and self-regulatory organizations to ensure that markets (B) and (C), respectively, require refinement and clarification by the Commission.’’). 23 See, e.g., Adam Nunes at 36 (‘‘The intent to manipulate * * * [is] critically important.’’); Cameron Smith at 37 (‘‘What really needs to be there in my mind is some notions of intent or phrases like ‘‘for the purpose of.’’); Don Wilson at 47 (‘‘I think it really comes down to intent.’’); Mark Fabian at 163 (‘‘I think everyone has agreed that intent is something that is required.’’). 24 See, e.g., Chopper Trading at 3 (‘‘Any definition of spoofing must include an element of an intent to manipulate the market.’’); FIA at 4 (‘‘The Commission should clarify that manipulative intent to create an artificial price is required to violate 5(A)’s prohibition on violating bids or offers * * * [and] that manipulative intent is necessary under 5(B)’s prohibition.’’); International Swaps and Derivatives Association at 3 (‘‘Manipulative intent is a necessary element of ‘manipulative’ or ‘disruptive’ conduct.’’). 25 See, e.g., Adam Nunes at 94 (‘‘[I]t’s really a pattern and practice of activity.’’); John Hyland at 147 (‘‘It’s patterns and practices, facts and circumstances.’’); Mark Fabian at 163 (‘‘A pattern is also required.’’). 26 The Commission does not believe that a trade becomes subject to 4c(a)(5) solely because it is reported on a swap data repository, even though a swap data repository is a registered entity. PO 00000 Frm 00052 Fmt 4703 Sfmt 4703 14945 operate in a fair and equitable manner without disruptive trading practices.27 The Commission agrees with commenters and panelists that a multilayered, coordinated approach is required to prevent disruptive trading practices and ensure fair and equitable trading through enforcement of these provisions.28 i. Violating Bids and Offers 1. Comments From ANPR and Roundtable During the roundtable discussion, panelists questioned how the concept of violating bids and offers applies across various trading platforms and markets.29 Commenters expressed a similar concern 30 and requested that the Commission clarify how the prohibition against violating bids and offers applies to swaps,31 open outcry pits,32 infrequently traded over-the-counter products,33 and electronic trading venues where the best bid and offer are matched automatically by algorithm.34 2. Commission Guidance The Commission interprets section 4c(a)(5)(A) as prohibiting any person from buying a contract at a price that is 27 See, e.g., CME Group Rule 432B.2 (‘‘It shall be an offense * * * to engage in conduct or proceedings inconsistent with just and equitable principles of trade.’’). 28 See, e.g., FIA at 10 (‘‘FIA strongly believes that a multi-layered enforcement approach, which implements policies and procedures at the firm, exchange and clearing level, will most effectively mitigate the risk of market disruptions.’’). 29 See, e.g., Greg Mocek at 173 (‘‘There’s more practical issues to think about in the context of the concepts themselves and how the industry is structured, like violating a bid and an offer.’’); Ken Raisler at 176 (generally asking how the concept of violating bids and offers applies to over-the-counter markets, swap execution facilities, and block trades). 30 See, e.g., CME Group at 4 (‘‘The Commission should make clear that the prohibition on violating bids or offers is not intended to create a best execution standard across venues as any such standard would be operationally and practically untenable.’’). 31 See, e.g., ISDA at 2 (‘‘The phrase ‘violating bids and offers’ simply has no meaning in most if not all swaps markets. The pricing and trading of many swaps involves a variety of factors (e.g., size, credit risk) which, taken together, render the concept of ‘‘violating bids or offers’’ as inapposite.’’). 32 See, e.g., CME Group at 4 (generally discussing how the concept of violating bids and offers applies to open outcry trading environments). 33 See, e.g., FIA at 4 (‘‘The Commission should clarify that the prohibition on violating bids or offers does not apply in the over-the-counter markets.’’). 34 See, e.g., CME Group at 4 (‘‘Order matching algorithms on electronic platforms preclude bids and offers from being violated.’’); FIA at 4 (‘‘Matching engines make it impossible to sell or buy except at the best available quote.’’); MFA at 5 (‘‘The term ‘violate bids or offers’ * * * has virtually no application to electronic trading where systems buy or sell at the best available quote.’’). E:\FR\FM\18MRN1.SGM 18MRN1 14946 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices higher than the lowest available offer price and/or selling a contract at a price that is lower than the highest available bid price. Such conduct, regardless of intent, disrupts the normal forces of supply and demand that are the foundation of fair and equitable trading. This proposed interpretive order is consistent with exchange rules that prohibit the violation of bids and offers.35 Notably, Congress did not include an intent requirement in section 4c(a)(5)(A) as it did in both sections 4c(a)(5)(B) and (C). Accordingly, the Commission interprets section 4c(a)(5)(A) as a per se offense, that is, the Commission is not required to show that a person violating bids or offers did so with any intent to disrupt fair and equitable trading. The Commission agrees that section 4c(a)(5)(A) does not apply where a person is unable to violate a bid or offer—i.e. when a person is utilizing an electronic trading system where algorithms automatically match the best bid and offer.36 Section 4c(a)(5)(A) will operate in any trading environment where a person exercises some control over the selection of the bids or offers against which they transact, including in an automated trading system which operates without pre-determined matching algorithms. The Commission recognizes that at any particular time the bid-ask spread in one trading environment may differ from the bid-ask spread in another trading environment. Accordingly, in the view of the Commission, section 4c(a)(5)(A) does not create any sort of best execution standard across multiple trading platforms and markets; rather, a person’s obligation to not violate bids or offers is confined to the specific trading venue which he or she is utilizing at a particular time. Finally, section 4c(a)(5)(A) does not apply where an individual is ‘‘buying the board’’—that is, executing a sequences of trades to buy all available bids or offers on that order book in accordance with the rules of the facility on which the trades were executed. Emcdonald on DSK2BSOYB1PROD with NOTICES ii. Orderly Execution of Transactions During the Closing Period 1. Comments From ANPR and Roundtable Roundtable panelists expressed the view that additional clarity was needed for the definitions incorporated in section 747(B), in particular, terms such 35 See, e.g., New York Mercantile Exchange Rule 514.A.3; Minneapolis Grain Exchange Rule 731.00. 36 See, e.g., CME Group at 4 (‘‘Order matching algorithms on electronic platforms preclude bids and offers from being violated.’’). VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 as ‘‘closing period.’’ 37 Commenters also requested clarification on the definition of closing period and requested Commission guidance on whether the prohibition on disorderly execution of transactions extends to conduct occurring outside the closing period.38 More specifically, some commenters requested that the prohibitions in section 747(B) be limited to manipulative conduct such as ‘‘banging’’ or ‘‘marking the close.’’ 39 2. Commission Guidance New CEA section 4c(a)(5)(B) prohibits any trading, practices, or conduct on or subject to the rules of a registered entity that ‘‘demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period.’’ In the view of the Commission, Congress’s inclusion of a scienter requirement means that accidental, or even negligent, trading conduct and practices will not suffice for a claim under section 4c(a)(5)(B); rather a market participant must at least act recklessly.40 Accordingly, section 4c(a)(5)(B) will not capture legitimate trading behavior and is not ‘‘a trap for those who act in good faith.’’ 41 The Commission interprets the closing period to be generally defined as the period in the contract or trade when the daily settlement price is determined under the rules of that trading facility.42 37 See, e.g., Greg Mocek at 173 (‘‘It’s easy to define the term ‘closing period’ presumably in a designated contract market. Are you planning on defining that period in a SEF?’’). 38 See, e.g., API at 12 (‘‘Trading practices or conduct outside the closing period are not relevant to determine whether conduct inside the closing period is deemed ‘orderly’.’’); HETCO at 7 (‘‘HETCO urges the Commission to refrain from applying the prohibition against disorderly trading to an overly broad trading time period.’’); CEF at 6 (‘‘The Commission should refrain from looking at trading practices outside of the closing period.’’). 39 See, e.g., FIA at 5 (‘‘The Commission should clarify that traditionally accepted types of market manipulation, such as ‘banging the close,’ ‘marking the close’ and pricing window manipulation fall under the prohibition of 5(B).’’). 40 See, e.g., Hammond v. Smith Barney, Harris Upham & Company, Inc., [1990–1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,617 (CFTC Mar. 1, 1990) (scienter requires proof that a defendant committed the alleged wrongful acts ‘‘intentionally or with reckless disregard for his duties under the Act’’); Drexel Burnham Lambert, Inc. v. CFTC, 850 F.2d 742, 748 (DC Cir. 1988) (holding that recklessness is sufficient to satisfy scienter requirement and that a reckless act is one where there is so little care that it is ‘‘difficult to believe the [actor] was not aware of what he was doing’’) (quoting First Commodity Corp. v. CFTC, 676 F.2d 1, 7 (1st Cir. 1982)). 41 United States v. Ragen, 314 U.S. 513, 524 (1942). 42 Closing periods may include the time period in which a daily settlement price is determined, the expiration day for a futures contract, and any period of time in which the cash-market transaction prices for a physical commodity are used in establishing PO 00000 Frm 00053 Fmt 4703 Sfmt 4703 While the Commission interprets the prohibition in section 4c(a)(5)(B) to encompass any trading, conduct, or practices occurring inside the closing period that affects the orderly execution of transactions during the closing period, potential disruptive conduct outside that period may nevertheless form the basis for an investigation of potential violations under this section and other sections under the Act. With respect to swaps executed on a SEF, a swap will be subject to the provisions of section 4c(a)(5)(B) if a closing period or daily settlement price exists for the particular swap. Additionally, section 4c(a)(5)(B) violations will include executed orders as well as any bids and offers submitted by individuals for the purposes of disrupting fair and equitable trading. Similar to other intent-based violations of the CEA, the Commission will consider all of the relevant facts and circumstances in determining whether a person violated section 4c(a)(5)(B). The Commission will evaluate the facts and circumstances as of the time the person engaged in the relevant trading, practices, or conduct (i.e. the Commission will consider what the person knew, or should have known, at the time he or she was engaging in the conduct at issue). The Commission will use existing concepts of orderliness of markets when assessing whether trades are executed, or orders are submitted, in an orderly fashion in the time periods prior to and during the closing period. In the view of the Commission, an orderly market may be characterized by, among other things, parameters such as a rational relationship between consecutive prices, a strong correlation between price changes and the volume of trades, levels of volatility that do not materially reduce liquidity, accurate relationships between the price of a derivative and the underlying such as a physical commodity or financial instrument, and reasonable spreads between contracts for near months and for remote months.43 Participants and regulators in a settlement price for a futures contract, option, or swap (as defined by the CEA). 43 Concepts applicable to the securities markets are useful in analyzing commodity markets because of similarities between the two areas. Concerning orderliness of markets, see, e.g., In re NYSE Specialists Securities Litigation, 503 F.3d 89 (2d Cir. 2007) (discussing role of specialists in maintaining orderly market and various circumventions of that role); Last Atlantis Partners, LLC v. AGS Specialist Partners, 533 F.Supp. 2d 828 (N.D. Ill. 2008) (allegation that trading specialists disengaged automated order execution mechanism to discriminate against customers having direct access to markets); LaBranche & Co., NYSE AMEX Hearing Board Decisions 09–AMEX–28, –29, and –30 (Oct. 2009) and NYSE Member Education E:\FR\FM\18MRN1.SGM 18MRN1 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices the commodity and securities markets are already familiar with these assessments of orderliness in connection with issues of market manipulation 44 and risk mitigation. The Commission believes that market participants should assess market conditions and consider how their trading practices and conduct affect the orderly execution of transactions during the closing period.45 iii. Spoofing Emcdonald on DSK2BSOYB1PROD with NOTICES 1. Comments From ANPR and Roundtable Roundtable panelists commented that there is no commonly-accepted definition of ‘‘spoofing’’ throughout the industry.46 Some commenters expressed a similar concern 47 and requested additional Commission guidance that any definition of ‘‘spoofing’’ set forth in section 4c(a)(5)(C) would not capture legitimate trading behavior.48 In particular, several comment letters also expressed views on whether partial fills should be exempt from the definition of ‘‘spoofing.’’ 49 Bulletin 2006–19 (discussing the proper design and use of specialist algorithms to avoid taking liquidity from the market at and surrounding the prevailing market price). 44 See, e.g., Cargill, Inc. v. Hardin, 452 F.2d 1154, 1170–71 (8th Cir. 1971) (market disruption through ‘‘squeeze’’ of shorts characterized by extraordinary price fluctuations, with little relationship to basic supply and demand factors for wheat; other markets not similarly affected; long employed unusual mechanism to liquidate position). 45 For example, absent an intentional or reckless disregard for the orderly execution of transactions during the closing period, a person would not be liable under 4c(a)(5)(B) upon executing an order during the closing period simply because the transactions had a substantial effect on the settlement price. 46 See, e.g., John J. Lothian at 82 (referring to spoofing as ‘‘a very undefined type of term within the industry’’). 47 See, e.g., Chopper Trading at 3 (‘‘The Commission must consider that spoofing does not have a generally understood definition in the futures markets.’’). 48 See, e.g., CME Group at 8 (‘‘The statute’s definition of ‘spoofing’ as ‘bidding or offering with the intent to cancel the bid or offer before execution,’ is too broad and does not differentiate legitimate market conduct from manipulative conduct that should be prohibited. The distinguishing characteristic between ‘spoofing’ that should be covered by paragraph (C) and the legitimate cancellation of other unfilled or partially filled orders is that ‘spoofing’ involves the intent to enter non bona fide orders for the purpose of misleading market participants and exploiting that deception.’’); HETCO at 7 (‘‘The Commission should describe, with specificity, what trade practices constitute spoofing, particularly where this is not a concept familiar to the markets for commodities and derivatives.’’); ICE at 8 (generally discussing the practice of ‘‘spoofing’’ as defined in paragraph (C) of Section 747 may capture legitimate trading behavior). 49 See, e.g., API at 14 (‘‘The Commission has requested comment on whether a ‘‘partial fill of an order * * * necessarily exempts that activity from VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 2. Commission Guidance New CEA section 4c(a)(5)(C) prohibits any trading, practice, or conduct that ‘‘is, is of the character of, or is commonly known to the trade as, ‘‘spoofing’’ (bidding or offering with the intent to cancel the bid or offer before execution).’’ To violate section 4c(a)(5)(C), a market participant must act with some degree of intent, or scienter, to engage in the ‘‘spoofing’’ trading practices prohibited by section 4c(a)(5)(C). In the view of the Commission, a 4c(a)(5)(C) ‘‘spoofing’’ violation requires that a person intend to cancel a bid or offer before execution; therefore, the Commission believes that reckless trading, conduct, or practices will not result in violations of section 4c(a)(5)(C).50 Furthermore, orders, modifications, or cancellations will not be classified as ‘‘spoofing’’ if they were submitted as part of a legitimate, goodfaith attempt to consummate a trade. Thus, the legitimate, good-faith cancellation of partially filled orders would not violate section 4c(a)(5)(C). However, a partial fill does not automatically exempt activity from being classified as ‘‘spoofing.’’ When distinguishing between legitimate trading involving partial executions and ‘‘spoofing’’ behavior, the Commission will evaluate the market context, the person’s pattern of trading activity (including fill characteristics), and other relevant facts and circumstances. For example, if a person’s intent when placing a bid or offer was to cancel the entire bid or offer prior to execution, regardless of whether such bid or offer was subsequently filled, that conduct may violate section 4c(a)(5)(C). Accordingly, under this interpretation, section 4c(a)(5)(C) will not capture legitimate trading. This ‘‘spoofing’’ prohibition covers bid and offer activity on all registered entities, including all regulated futures, options, and swap execution facilities, including all bids and offers in pre-open periods or during other exchangecontrolled trading halts. ‘‘Spoofing’’ also includes, but is not limited to: (i) Submitting or cancelling bids or offers to overload the quotation system of a registered entity, (ii) submitting or cancelling bids or offers to delay another person’s execution of trades; and (iii) submitting or cancelling multiple bids or offers to create an being defined as ‘spoofing.’ The answer is yes.’’); HETCO at 8 (‘‘A partial fill of an order or series of orders should not exempt the activity described above from being defined as ‘spoofing’.’’). 50 Similar to violations under section 4c(a)(5)(B), accidental or negligent trading, practices, and conduct will not constitute violations of section 4c(a)(5)(C). PO 00000 Frm 00054 Fmt 4703 Sfmt 4703 14947 appearance of false market depth.51 However, the ‘‘spoofing’’ provision is not intended to cover non-executable market communications such as requests for quotes and other authorized pre-trade communications. As with other intent-based violations, the Commission distinguishes between legitimate trading and ‘‘spoofing’’ by evaluating all of the facts and circumstances of each particular case, including a person’s trading practices and patterns. Notably, a section 4c(a)(5)(C) violation does not require a pattern of activity, even a single instance of trading activity can be disruptive of fair and equitable trading. Issued in Washington, DC, on February 24, 2011 by the Commission. David A. Stawick, Secretary of the Commission. Appendices to Antidisruptive Practices Authority—Commission Voting Summary; Statements of Commissioners; List of Roundtable Participants and Commenters Appendix 1—Commission Voting Summary On this matter, Chairman Gensler and Commissioners Dunn, Chilton and O’Malia voted in the affirmative; Commissioner Sommers voted in the negative. Appendix 2—Statement of Chairman Gary Gensler I support the proposed interpretive order regarding disruptive practices on designated contract markets or swap execution facilities. Congress expressly prohibited three trading practices that it deemed were disruptive of fair and equitable trading. Today’s order provides additional guidance to market participants and the public on the trading, practices and conduct that violate these statutory provisions. The order also addresses comments received by the Commission at the December 2nd roundtable and in response to the Advanced Notice of 51 See, e.g., Trillium Brokerage Services, LLC, Letter of Acceptance, Waiver and Consent, No. 2007007678201, from the Financial Industry Regulatory Authority (‘‘FINRA’’) (issued September 12, 2010) for a discussion of a ‘‘spoofing’’ case involving an illicit high frequency trading strategy. Under their ‘‘spoofing’’ strategy, Trillium entered numerous layered, non-bona fide market moving orders to generate selling or buying interest in specific stocks. By entering the non-bona fide orders, often in substantial size relative to a stock’s overall legitimate pending order volume, Trillium traders created a false appearance of buy- or sellside pressure. This trading strategy induced other market participants to enter orders to execute against limit orders previously entered by the Trillium traders. Once their orders were filled, the Trillium traders would then immediately cancel orders that had only been designed to create the false appearance of market activity. The Letter of Acceptance, Waiver and Consent and accompanying press release from FINRA can be accessed at https://www.finra.org/Newsroom/ NewsReleases/2010/P12195. E:\FR\FM\18MRN1.SGM 18MRN1 14948 Federal Register / Vol. 76, No. 53 / Friday, March 18, 2011 / Notices Proposed Rulemaking on disruptive trading practices. The order addresses the comments by clarifying how the Commission will interpret and implement the provisions of Section 747. I look forward to hearing from the public in response to this proposed interpretive order. The comment letters and staff roundtable were extremely helpful in formulating this proposed order. Appendix III December 2, 2010 CFTC Staff Roundtable on Disruptive Trading Practices I. Panel One: Opportunities and Challenges to Fair and Equitable Trading i. Ensuring Fair and Equitable Trading at the Close ii. Exploring ‘‘the character of’’ Spoofing a. Panelists: John Hyland—U.S. Natural Gas Fund; Rajiv Fernando—Chopper Trading LLC; Adam Nunes—Hudson River Trading Group; Cameron Smith—Quantlab Financial, LLC; Liam Connell—Allston Trading, LLC; Don Wilson—DRW Trading Group; Joel Hasbrouck—New York University; Gary DeWaal—Newedge USA, LLC; Mark Fisher— MBF Clearing Corp; John Lothian—John J. Lothian & Company. II. Panel Two: Rules ‘‘Reasonably Necessary’’ To Prohibit Disruptive Trading a. Panelists: Tom Gira—Financial Industry Regulatory Authority; Chris Heymeyer— National Futures Association; Ike Gibbs— ConocoPhillips; Dean Payton—Chicago Mercantile Exchange; Mark Fabian— IntercontinentalExchange; Joe Mecane—New York Stock Exchange; Greg Mocek— McDermott Will & Emery; Ken Raisler on behalf of Futures Industry Association— Sullivan and Cromwell LLP; Micah Green— Patton Boggs LLP; Tyson Slocum—Public Citizen; Andrew Lo—Massachusetts Institute of Technology. III. Panel Three: Exchange Perspectives on Disruptive Trading; Potential New Disruptive Trading Practices a. Panelists: Tom Gira—Financial Industry Regulatory Authority; Chris Heymeyer— National Futures Association; Dean Payton— Chicago Mercantile Exchange; Mark Fabian— IntercontinentalExchange; Joe Mecane—New York Stock Exchange; Andrew Lo— Massachusetts Institute of Technology. Emcdonald on DSK2BSOYB1PROD with NOTICES Appendix IV Parties Submitting Comment Letters in Response to Disruptive Trading Practices ANPR A. Flachman American Petroleum Institute (API) Argus Media, Inc. (Argus) Better Markets (BM) Bix Weir Chopper Trading, LLC (Chopper Trading) CME Group, Inc. (CME Group) Commodity Markets Council (CMC) David S. Nichols DeWitt Brown Edison Electric Institute (EEI) Emilie Lauran Futures Industry Association (FIA) VerDate Mar<15>2010 18:30 Mar 17, 2011 Jkt 223001 Hess Energy Trading Company, LLC (HETCO) IntercontinentalExchange, Inc., and ICE Futures U.S., Inc. (collectively, ICE) International Swaps and Derivatives Association, Inc. (ISDA) Investment Company Institute (ICI) Managed Funds Association (MFA) Minneapolis Grain Exchange, Inc. (MGEX) Newedge USA, LLC (Newedge USA) Nicole Provo Peter J. Carini Petroleum Marketers Association of America (PMAA) Rebecca Washington Securities Industry and Financial Markets Association (SIFMA) U.S. Senator Carl Levin West Virginia Oil Marketers & Grocers Association (OMEGA) Working Group of Commercial Energy Firms (CEF) electronic comments in the following way: Federal eRulemaking Portal: https:// www.regulations.gov. Follow the instructions for submitting comments. To ensure timely processing of comments, the Commission is no longer accepting comments submitted by electronic mail (e-mail) except through https://www.regulations.gov. Submit written submissions in the following way: Mail/Hand delivery/Courier (for paper, disk, or CD–ROM submissions), preferably in five copies, to: Office of the Secretary, U.S. Consumer Product Safety Commission, Room 502, 4330 East West Highway, Bethesda, MD 20814; telephone (301) 504–7923. Instructions: All submissions received must include the agency name and [FR Doc. 2011–6398 Filed 3–17–11; 8:45 am] docket number for this notice. All comments received may be posted BILLING CODE 6351–01–P without change, including any personal identifiers, contact information, or other personal information provided, to CONSUMER PRODUCT SAFETY https://www.regulations.gov. Do not COMMISSION submit confidential business Agency Information Collection information, trade secret information, or Activities: Proposed Collection; other sensitive or protected information Comment Request; Generic Clearance electronically. Such information should for the Collection of Qualitative be submitted in writing. Feedback on Agency Service Delivery Docket: For access to the docket to read background documents or AGENCY: U.S. Consumer Product Safety comments received, go to https:// Commission. www.regulations.gov. ACTION: 30-Day notice of submission of FOR FURTHER INFORMATION CONTACT: information collection approval from Linda Glatz, Division of Policy and the Office of Management and Budget Planning, Office of Information and request for comments. Technology and Technology Services, SUMMARY: As part of a Federal U.S. Consumer Product Safety Government-wide effort to streamline Commission, 4330 East West Highway, the process to seek feedback from the Bethesda, MD 20814 telephone: 301– public on service delivery, the U.S. 504–7671 or e-mail: lglatz@cpsc.gov. Consumer Product Safety Commission SUPPLEMENTARY INFORMATION: In the (‘‘CPSC,’’ ‘‘Commission,’’ or ‘‘we’’) has Federal Register of December 22, 2010 submitted a Generic Information (75 FR 80542), the Office of Collection Request (Generic ICR): Management and Budget (OMB) ‘‘Generic Clearance for the Collection of published a notice (‘‘OMB notice’’) Qualitative Feedback on Agency Service stating that, as part of a Federal Delivery’’ to OMB for approval under Government-wide effort to streamline the Paperwork Reduction Act (PRA) (44 the process to seek feedback from the U.S.C. 3501 et. seq.). public on service delivery, OMB is DATES: Comments must be submitted coordinating the development of a April 18, 2011. proposed Generic Information Collection Request titled, ‘‘Generic ADDRESSES: Written comments may be Clearance for the Collection of faxed to the Office of Information and Qualitative Feedback on Agency Service Regulatory Affairs, OMB, Attn: CPSC Delivery’’ for approval under the Desk Officer, FAX: 202–395–6974, or ePaperwork Reduction Act (PRA) (44 mailed to U.S.C. 3501 et. seq.). The OMB notice oira_submission@omb.eop.gov. All announced that agencies (including the comments should be identified by the CPSC) intend to submit this collection CPSC Docket No. CPSC [ ] and the title to OMB for approval and also invited ‘‘Generic Clearance for the Collection of Qualitative Feedback on Agency Service comments on specific aspects for the Delivery.’’ The written comments should proposed information collection. The OMB notice also provided an estimated also be submitted to the CPSC, information collection burden and identified by Docket No. CPSC [ ], by stated that agencies would provide more any of the following methods: Submit PO 00000 Frm 00055 Fmt 4703 Sfmt 4703 E:\FR\FM\18MRN1.SGM 18MRN1

Agencies

Commodity Futures Trading Commission

[Federal Register Volume 76, Number 53 (Friday, March 18, 2011)]
[Notices]
[Pages 14943-14948]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-6398]


=======================================================================
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COMMODITY FUTURES TRADING COMMISSION


Antidisruptive Practices Authority

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed Interpretive Order.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing this interpretive order to provide interpretive 
guidance regarding the three statutory disruptive practices set forth 
in new section 4c(a)(5) of the Commodity Exchange Act (``CEA'') 
pursuant to section 747 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (``Dodd-Frank Act''). The Commission requests 
comment on all aspects of the proposed interpretive order.

DATES: Comments must be received on or before May 17, 2011.

ADDRESSES: Comments, identified by RIN number, may be sent by any of 
the following methods:
     Agency Web site, via its Comments Online process: https://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
     Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.

FOR FURTHER INFORMATION CONTACT: Robert Pease, Counsel to the Director 
of Enforcement, 202-418-5863, rpease@cftc.gov; Steven E. Seitz, 
Attorney, Office of the General Counsel, 202-418-5615, sseitz@cftc.gov; 
or Mark D. Higgins, Counsel to the Director of Enforcement, 202-418-
5864, mhiggins@cftc.gov, Commodity Futures Trading Commission, Three 
Lafayette

[[Page 14944]]

Centre, 1151 21st Street, NW., Washington, DC 20581.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that may be exempt from disclosure under the Freedom of 
Information Act (``FOIA''),\1\ a petition for confidential treatment of 
the exempt information may be submitted according to the established 
procedures in Sec.  145.9 of the CFTC's regulations.\2\ The Commission 
reserves the right, but shall have no obligation, to review, prescreen 
filter, redact, refuse, or remove any or all of your submission from 
https://www.cftc.gov that it may deem to be inappropriate for 
publication, such as obscene language. All submissions that have been 
redacted or removed that contain comments on the merits of the 
rulemaking will be retained in the public comment file and will be 
considered as required under the Administrative Procedure Act and other 
applicable laws, and may be accessible under FOIA.
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    \1\ 5 U.S.C. 552.
    \2\ 17 CFR 145.9.

SUPPLEMENTARY INFORMATION:

Prohibition of Disruptive Practices

I. Statutory and Regulatory Authorities

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank Act'').\3\ Title VII 
of the Dodd-Frank Act \4\ amended the Commodity Exchange Act (``CEA'') 
\5\ to establish a comprehensive new regulatory framework for swaps and 
security-based swaps. The legislation was enacted to reduce risk, 
increase transparency, and promote market integrity within the 
financial system by, among other things: (1) Providing for the 
registration and comprehensive regulation of swap dealers and major 
swap participants; (2) imposing clearing and trade execution 
requirements on standardized derivative products; (3) creating robust 
recordkeeping and real-time reporting regimes; and (4) enhancing the 
Commission's rulemaking and enforcement authorities with respect to, 
among others, all registered entities and intermediaries subject to the 
Commission's oversight.
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    \3\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act of 2010, Public Law 111-203, 124 Stat. 1376 (2010). The text of 
the Dodd-Frank Act may be accessed at https://www.cftc.gov./
LawRegulation/OTCDERIVATIVES/index.htm.
    \4\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \5\ 7 U.S.C. 1 et seq.
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    Section 747 of the Dodd-Frank Act amends section 4c(a) of the CEA 
to add a new section entitled ``Disruptive Practices.'' New CEA section 
4c(a)(5) makes it unlawful for any person to engage in any trading, 
practice, or conduct on or subject to the rules of a registered entity 
that--
    (A) Violates bids or offers;
    (B) Demonstrates intentional or reckless disregard for the orderly 
execution of transactions during the closing period; or
    (C) Is, is of the character of, or is commonly known to the trade 
as, ``spoofing'' (bidding or offering with the intent to cancel the bid 
or offer before execution).
    Dodd-Frank Act section 747 also amends section 4c(a) by granting 
the Commission authority under new CEA section 4c(a)(6) to promulgate 
such ``rules and regulations as, in the judgment of the Commission, are 
reasonably necessary to prohibit the trading practices'' enumerated 
therein ``and any other trading practice that is disruptive of fair and 
equitable trading.''
    The Commission is issuing this proposed interpretive order to 
provide market participants and the public with guidance on the scope 
of the statutory prohibitions set forth in section 4c(a)(5). The 
Commission requests comment on all aspects of this proposed 
interpretive order, as well as comment on the specific provisions and 
issues highlighted below.

II. Background

    On November 2, 2010, the Commission issued an advance notice of 
proposed rulemaking (``ANPR'') asking for public comment on all aspects 
of Dodd-Frank Act section 747.\6\ When the ANPR was issued, the 
Commission was considering whether to adopt regulations regarding the 
disruptive practices set forth in new CEA section 4c(a)(5). After 
reviewing the ANPR comments, the Commission determined that it was 
appropriate to address the statutory disruptive practices through a 
proposed interpretive order. Accordingly, a Commission document 
terminating the ANPR is being published elsewhere in the Proposed Rules 
section of this issue of the Federal Register. Notwithstanding that 
termination, the Commission considered all of the ANPR commentary in 
developing this proposed interpretive order.
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    \6\ 75 FR 67301, Nov. 2, 2010.
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    In the ANPR, commenters were encouraged to address the nineteen 
specific questions posed by the Commission in the ANPR.\7\ The ANPR 
requested, among other things, comment on section 747(A) (``violating 
bids and offers''), section 747(B) (``the disorderly execution of 
transactions around the closing period''), section 747(C) 
(``spoofing''), the role of executing brokers, and the regulation of 
algorithmic and automated trading systems.\8\ The questions in the ANPR 
also formed the basis for a December 2, 2010, roundtable held by 
Commission staff in Washington, DC.\9\ The full-day roundtable 
consisted of three panels \10\ that addressed the ANPR questions, the 
role of exchanges in CFTC-regulated markets, and whether there are 
other potential disruptive trading practices that the Commission should 
prohibit. The ANPR set a deadline of January 3, 2011, by which comments 
had to be submitted.\11\ In response to the ANPR, the Commission 
received 28 comments from interested parties,\12\ including industry 
members, trade associations, consumer groups, exchanges, one member of 
the U.S. Congress, and other interested members of the public.\13\ The 
Commission has carefully considered all of the ANPR comments, as well 
as the roundtable discussion, in proposing this interpretive order.
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    \7\ The ANPR may be accessed through: https://comments.cftc.gov/PublicComments/CommentList.aspx?id=893.
    \8\ 75 FR 67302, Nov. 2, 2010.
    \9\ See Appendix III for a list of roundtable participants and 
discussion panels. A verbatim transcript of the disruptive trading 
practices roundtable may be accessed at https://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission24_120210-transcri.pdf.
    \10\ Note that citations to statements by the panelists at the 
public roundtable will be cited as [Panelist name at page X of 
roundtable transcript].
    \11\ 75 FR 67301, Nov. 2, 2010.
    \12\ See Appendix IV for a list of parties submitting comment 
letters in response to the ANPR.
    \13\ The comment letters received by the Commission in response 
to the ANPR may be accessed through: https://comments.cftc.gov/PublicComments/CommentList.aspx?id=893.
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    Throughout the roundtable discussion and comment letters, there was 
widespread support for the Commission's goal of preventing disruptive 
trading practices and ensuring fair and equitable markets.\14\ Several 
themes emerged from the roundtable discussion and the comment

[[Page 14945]]

letters, which are discussed below in the following sections.
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    \14\ Liam Connell at 40 (``Allston Trading supports the mission 
of the CFTC to maintain orderly markets and to prohibit deceptive 
practices and manipulative trading.''); Rajiv Fernando at 17 (``I 
support the CFTC's effort to ensure that markets operate in an 
orderly way that's fair for all participants.''); Argus at 1 
(``Argus supports the important goal of preventing disruptive trade 
practices in CFTC jurisdictional markets.'').
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a. Market Participants Request Additional Guidance Regarding the Scope 
and Application of Section 747's Provisions

    Throughout the Commission roundtable, panelists stated that the 
provisions of section 747 were vague \15\ and did not provide market 
participants with adequate notice of the type of trading, practices, 
and conduct that is prohibited by section 4c(a)(5).\16\ Several comment 
letters also raised concerns about vagueness and believed that Dodd-
Frank Section 747 was susceptible to constitutional challenge.\17\ 
Comment letters requested that the Commission provide additional 
guidance concerning the conduct and trading practices that constitute 
violations under the statute.\18\ During the roundtable discussion, 
panelists also requested additional clarity and refinement in the 
definition of terms such as ``the orderly execution of transactions,'' 
\19\ ``closing period,'' \20\ and ``spoofing.'' \21\ The comment 
letters reiterated this concern and expressed the need for the 
Commission to define these terms and other concepts such as violating 
bids and offers.\22\
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    \15\ See. e.g., Gary DeWaal at 57 (``This is an incredibly vague 
provision.''); Greg Mocek at 170 (``There are a lot of issues on 
vagueness.'').
    \16\ See, e.g., Adam Nunes at 20 (``Additional guidance * * * is 
going to be necessary.''); Ike Gibbs at 157 (``We would really 
prefer to see a scenario where the Commission is not overly 
prescriptive [and] we're given guidance as to what's appropriate and 
what's not appropriate.'').
    \17\ See, e.g., Managed Funds Association at 4 (``Dodd-Frank Act 
Section 747 as written is vague and particularly vulnerable to 
constitutional challenge by market participants.''); CME Group at 2 
(``As written, Section 747 is vague and susceptible to 
constitutional challenge.'').
    \18\ See, e.g., American Petroleum Institute at 2 (``The 
Commission should provide specific guidance regarding the scope of 
the trading practices listed in 747.''); Investment Company 
Institute at 2 (Recommending that the ``Commission provide 
additional guidance as to the types of conduct that would constitute 
violations under the statute.''); HETCO at 4 (``The Commission 
should resolve the ambiguity in Section 4c(a)(5) by articulating the 
specific types of disruptive practices that prompted it to request 
the new enforcement authority in Section 747.'').
    \19\ See, e.g., Adam Nunes at 26 (``When we look at disruptive 
trading practices and the intentional reckless disregard for orderly 
execution that is going to be very difficult to define.'').
    \20\ See, e.g., Don Wilson at 46 (``The definition of those 
rules around what is and is not acceptable in the closing period 
needs to be carefully considered.'').
    \21\ See, e.g., Gary DeWaal at 64 (``I'm not sure the definition 
of spoofing can be agreed upon by the ten people around this 
table.''); John J. Lothian at 82 (Referring to `spoofing' as a 
``very undefined type of term within the industry.'').
    \22\ See, e.g., Futures Industry Association at 3 (``Definitions 
such as `orderly execution,' `violates bids or offers' and 
`spoofing' in Sections 4c(a)(5)(A), (B) and (C), respectively, 
require refinement and clarification by the Commission.'').
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    Panelists and commenters also sought clarity on whether scienter is 
required for each of the enumerated practices of section 4c(a)(5), and 
if so, specificity as to the degree of intent required. Roundtable 
panelists \23\ and commenters \24\ stated that a showing of bad intent 
should be necessary to distinguish prohibited conduct from legitimate 
trading activities. Panelists further stressed that any evaluation of 
trading behavior must consider the historical trading patterns and 
practices of market participants.\25\
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    \23\ See, e.g., Adam Nunes at 36 (``The intent to manipulate * * 
* [is] critically important.''); Cameron Smith at 37 (``What really 
needs to be there in my mind is some notions of intent or phrases 
like ``for the purpose of.''); Don Wilson at 47 (``I think it really 
comes down to intent.''); Mark Fabian at 163 (``I think everyone has 
agreed that intent is something that is required.'').
    \24\ See, e.g., Chopper Trading at 3 (``Any definition of 
spoofing must include an element of an intent to manipulate the 
market.''); FIA at 4 (``The Commission should clarify that 
manipulative intent to create an artificial price is required to 
violate 5(A)'s prohibition on violating bids or offers * * * [and] 
that manipulative intent is necessary under 5(B)'s prohibition.''); 
International Swaps and Derivatives Association at 3 (``Manipulative 
intent is a necessary element of `manipulative' or `disruptive' 
conduct.'').
    \25\ See, e.g., Adam Nunes at 94 (``[I]t's really a pattern and 
practice of activity.''); John Hyland at 147 (``It's patterns and 
practices, facts and circumstances.''); Mark Fabian at 163 (``A 
pattern is also required.'').
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    In response to these comments, the Commission is proposing this 
Interpretive Order to provide additional guidance to market 
participants and the public on the types of trading, conduct, and 
practices that will constitute violations of section 4c(a)(5). This 
proposed interpretive order addresses the concerns expressed by the 
commenters regarding market uncertainty by clarifying how the 
Commission will interpret and implement the provisions of section 
4c(a)(5). By the terms of the statute, 4c(a)(5) applies to trading, 
practices or conduct on or subject to the rules of a registered entity: 
a designated contract market or a swap execution facility 
(``SEF'').\26\ The Commission interprets that section 4c(a)(5) will not 
apply to block trades or exchanges for related positions (``EFRPs'') 
transacted in accordance with the rules of a designated contract market 
or SEF or bilaterally negotiated swap transactions.
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    \26\ The Commission does not believe that a trade becomes 
subject to 4c(a)(5) solely because it is reported on a swap data 
repository, even though a swap data repository is a registered 
entity.
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    The Commission stresses the important role and unique position of 
exchanges and self-regulatory organizations to ensure that markets 
operate in a fair and equitable manner without disruptive trading 
practices.\27\ The Commission agrees with commenters and panelists that 
a multi-layered, coordinated approach is required to prevent disruptive 
trading practices and ensure fair and equitable trading through 
enforcement of these provisions.\28\
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    \27\ See, e.g., CME Group Rule 432B.2 (``It shall be an offense 
* * * to engage in conduct or proceedings inconsistent with just and 
equitable principles of trade.'').
    \28\ See, e.g., FIA at 10 (``FIA strongly believes that a multi-
layered enforcement approach, which implements policies and 
procedures at the firm, exchange and clearing level, will most 
effectively mitigate the risk of market disruptions.'').
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i. Violating Bids and Offers
1. Comments From ANPR and Roundtable
    During the roundtable discussion, panelists questioned how the 
concept of violating bids and offers applies across various trading 
platforms and markets.\29\ Commenters expressed a similar concern \30\ 
and requested that the Commission clarify how the prohibition against 
violating bids and offers applies to swaps,\31\ open outcry pits,\32\ 
infrequently traded over-the-counter products,\33\ and electronic 
trading venues where the best bid and offer are matched automatically 
by algorithm.\34\
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    \29\ See, e.g., Greg Mocek at 173 (``There's more practical 
issues to think about in the context of the concepts themselves and 
how the industry is structured, like violating a bid and an 
offer.''); Ken Raisler at 176 (generally asking how the concept of 
violating bids and offers applies to over-the-counter markets, swap 
execution facilities, and block trades).
    \30\ See, e.g., CME Group at 4 (``The Commission should make 
clear that the prohibition on violating bids or offers is not 
intended to create a best execution standard across venues as any 
such standard would be operationally and practically untenable.'').
    \31\ See, e.g., ISDA at 2 (``The phrase `violating bids and 
offers' simply has no meaning in most if not all swaps markets. The 
pricing and trading of many swaps involves a variety of factors 
(e.g., size, credit risk) which, taken together, render the concept 
of ``violating bids or offers'' as inapposite.'').
    \32\ See, e.g., CME Group at 4 (generally discussing how the 
concept of violating bids and offers applies to open outcry trading 
environments).
    \33\ See, e.g., FIA at 4 (``The Commission should clarify that 
the prohibition on violating bids or offers does not apply in the 
over-the-counter markets.'').
    \34\ See, e.g., CME Group at 4 (``Order matching algorithms on 
electronic platforms preclude bids and offers from being 
violated.''); FIA at 4 (``Matching engines make it impossible to 
sell or buy except at the best available quote.''); MFA at 5 (``The 
term `violate bids or offers' * * * has virtually no application to 
electronic trading where systems buy or sell at the best available 
quote.'').
---------------------------------------------------------------------------

2. Commission Guidance
    The Commission interprets section 4c(a)(5)(A) as prohibiting any 
person from buying a contract at a price that is

[[Page 14946]]

higher than the lowest available offer price and/or selling a contract 
at a price that is lower than the highest available bid price. Such 
conduct, regardless of intent, disrupts the normal forces of supply and 
demand that are the foundation of fair and equitable trading. This 
proposed interpretive order is consistent with exchange rules that 
prohibit the violation of bids and offers.\35\ Notably, Congress did 
not include an intent requirement in section 4c(a)(5)(A) as it did in 
both sections 4c(a)(5)(B) and (C). Accordingly, the Commission 
interprets section 4c(a)(5)(A) as a per se offense, that is, the 
Commission is not required to show that a person violating bids or 
offers did so with any intent to disrupt fair and equitable trading.
---------------------------------------------------------------------------

    \35\ See, e.g., New York Mercantile Exchange Rule 514.A.3; 
Minneapolis Grain Exchange Rule 731.00.
---------------------------------------------------------------------------

    The Commission agrees that section 4c(a)(5)(A) does not apply where 
a person is unable to violate a bid or offer--i.e. when a person is 
utilizing an electronic trading system where algorithms automatically 
match the best bid and offer.\36\ Section 4c(a)(5)(A) will operate in 
any trading environment where a person exercises some control over the 
selection of the bids or offers against which they transact, including 
in an automated trading system which operates without pre-determined 
matching algorithms. The Commission recognizes that at any particular 
time the bid-ask spread in one trading environment may differ from the 
bid-ask spread in another trading environment. Accordingly, in the view 
of the Commission, section 4c(a)(5)(A) does not create any sort of best 
execution standard across multiple trading platforms and markets; 
rather, a person's obligation to not violate bids or offers is confined 
to the specific trading venue which he or she is utilizing at a 
particular time. Finally, section 4c(a)(5)(A) does not apply where an 
individual is ``buying the board''--that is, executing a sequences of 
trades to buy all available bids or offers on that order book in 
accordance with the rules of the facility on which the trades were 
executed.
---------------------------------------------------------------------------

    \36\ See, e.g., CME Group at 4 (``Order matching algorithms on 
electronic platforms preclude bids and offers from being 
violated.'').
---------------------------------------------------------------------------

ii. Orderly Execution of Transactions During the Closing Period
1. Comments From ANPR and Roundtable
    Roundtable panelists expressed the view that additional clarity was 
needed for the definitions incorporated in section 747(B), in 
particular, terms such as ``closing period.'' \37\ Commenters also 
requested clarification on the definition of closing period and 
requested Commission guidance on whether the prohibition on disorderly 
execution of transactions extends to conduct occurring outside the 
closing period.\38\ More specifically, some commenters requested that 
the prohibitions in section 747(B) be limited to manipulative conduct 
such as ``banging'' or ``marking the close.'' \39\
---------------------------------------------------------------------------

    \37\ See, e.g., Greg Mocek at 173 (``It's easy to define the 
term `closing period' presumably in a designated contract market. 
Are you planning on defining that period in a SEF?'').
    \38\ See, e.g., API at 12 (``Trading practices or conduct 
outside the closing period are not relevant to determine whether 
conduct inside the closing period is deemed `orderly'.''); HETCO at 
7 (``HETCO urges the Commission to refrain from applying the 
prohibition against disorderly trading to an overly broad trading 
time period.''); CEF at 6 (``The Commission should refrain from 
looking at trading practices outside of the closing period.'').
    \39\ See, e.g., FIA at 5 (``The Commission should clarify that 
traditionally accepted types of market manipulation, such as 
`banging the close,' `marking the close' and pricing window 
manipulation fall under the prohibition of 5(B).'').
---------------------------------------------------------------------------

2. Commission Guidance
    New CEA section 4c(a)(5)(B) prohibits any trading, practices, or 
conduct on or subject to the rules of a registered entity that 
``demonstrates intentional or reckless disregard for the orderly 
execution of transactions during the closing period.'' In the view of 
the Commission, Congress's inclusion of a scienter requirement means 
that accidental, or even negligent, trading conduct and practices will 
not suffice for a claim under section 4c(a)(5)(B); rather a market 
participant must at least act recklessly.\40\ Accordingly, section 
4c(a)(5)(B) will not capture legitimate trading behavior and is not ``a 
trap for those who act in good faith.'' \41\
---------------------------------------------------------------------------

    \40\ See, e.g., Hammond v. Smith Barney, Harris Upham & Company, 
Inc., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 24,617 
(CFTC Mar. 1, 1990) (scienter requires proof that a defendant 
committed the alleged wrongful acts ``intentionally or with reckless 
disregard for his duties under the Act''); Drexel Burnham Lambert, 
Inc. v. CFTC, 850 F.2d 742, 748 (DC Cir. 1988) (holding that 
recklessness is sufficient to satisfy scienter requirement and that 
a reckless act is one where there is so little care that it is 
``difficult to believe the [actor] was not aware of what he was 
doing'') (quoting First Commodity Corp. v. CFTC, 676 F.2d 1, 7 (1st 
Cir. 1982)).
    \41\ United States v. Ragen, 314 U.S. 513, 524 (1942).
---------------------------------------------------------------------------

    The Commission interprets the closing period to be generally 
defined as the period in the contract or trade when the daily 
settlement price is determined under the rules of that trading 
facility.\42\ While the Commission interprets the prohibition in 
section 4c(a)(5)(B) to encompass any trading, conduct, or practices 
occurring inside the closing period that affects the orderly execution 
of transactions during the closing period, potential disruptive conduct 
outside that period may nevertheless form the basis for an 
investigation of potential violations under this section and other 
sections under the Act. With respect to swaps executed on a SEF, a swap 
will be subject to the provisions of section 4c(a)(5)(B) if a closing 
period or daily settlement price exists for the particular swap. 
Additionally, section 4c(a)(5)(B) violations will include executed 
orders as well as any bids and offers submitted by individuals for the 
purposes of disrupting fair and equitable trading.
---------------------------------------------------------------------------

    \42\ Closing periods may include the time period in which a 
daily settlement price is determined, the expiration day for a 
futures contract, and any period of time in which the cash-market 
transaction prices for a physical commodity are used in establishing 
a settlement price for a futures contract, option, or swap (as 
defined by the CEA).
---------------------------------------------------------------------------

    Similar to other intent-based violations of the CEA, the Commission 
will consider all of the relevant facts and circumstances in 
determining whether a person violated section 4c(a)(5)(B). The 
Commission will evaluate the facts and circumstances as of the time the 
person engaged in the relevant trading, practices, or conduct (i.e. the 
Commission will consider what the person knew, or should have known, at 
the time he or she was engaging in the conduct at issue). The 
Commission will use existing concepts of orderliness of markets when 
assessing whether trades are executed, or orders are submitted, in an 
orderly fashion in the time periods prior to and during the closing 
period. In the view of the Commission, an orderly market may be 
characterized by, among other things, parameters such as a rational 
relationship between consecutive prices, a strong correlation between 
price changes and the volume of trades, levels of volatility that do 
not materially reduce liquidity, accurate relationships between the 
price of a derivative and the underlying such as a physical commodity 
or financial instrument, and reasonable spreads between contracts for 
near months and for remote months.\43\ Participants and regulators in

[[Page 14947]]

the commodity and securities markets are already familiar with these 
assessments of orderliness in connection with issues of market 
manipulation \44\ and risk mitigation. The Commission believes that 
market participants should assess market conditions and consider how 
their trading practices and conduct affect the orderly execution of 
transactions during the closing period.\45\
---------------------------------------------------------------------------

    \43\ Concepts applicable to the securities markets are useful in 
analyzing commodity markets because of similarities between the two 
areas. Concerning orderliness of markets, see, e.g., In re NYSE 
Specialists Securities Litigation, 503 F.3d 89 (2d Cir. 2007) 
(discussing role of specialists in maintaining orderly market and 
various circumventions of that role); Last Atlantis Partners, LLC v. 
AGS Specialist Partners, 533 F.Supp. 2d 828 (N.D. Ill. 2008) 
(allegation that trading specialists disengaged automated order 
execution mechanism to discriminate against customers having direct 
access to markets); LaBranche & Co., NYSE AMEX Hearing Board 
Decisions 09-AMEX-28, -29, and -30 (Oct. 2009) and NYSE Member 
Education Bulletin 2006-19 (discussing the proper design and use of 
specialist algorithms to avoid taking liquidity from the market at 
and surrounding the prevailing market price).
    \44\ See, e.g., Cargill, Inc. v. Hardin, 452 F.2d 1154, 1170-71 
(8th Cir. 1971) (market disruption through ``squeeze'' of shorts 
characterized by extraordinary price fluctuations, with little 
relationship to basic supply and demand factors for wheat; other 
markets not similarly affected; long employed unusual mechanism to 
liquidate position).
    \45\ For example, absent an intentional or reckless disregard 
for the orderly execution of transactions during the closing period, 
a person would not be liable under 4c(a)(5)(B) upon executing an 
order during the closing period simply because the transactions had 
a substantial effect on the settlement price.
---------------------------------------------------------------------------

iii. Spoofing
1. Comments From ANPR and Roundtable
    Roundtable panelists commented that there is no commonly-accepted 
definition of ``spoofing'' throughout the industry.\46\ Some commenters 
expressed a similar concern \47\ and requested additional Commission 
guidance that any definition of ``spoofing'' set forth in section 
4c(a)(5)(C) would not capture legitimate trading behavior.\48\ In 
particular, several comment letters also expressed views on whether 
partial fills should be exempt from the definition of ``spoofing.'' 
\49\
---------------------------------------------------------------------------

    \46\ See, e.g., John J. Lothian at 82 (referring to spoofing as 
``a very undefined type of term within the industry'').
    \47\ See, e.g., Chopper Trading at 3 (``The Commission must 
consider that spoofing does not have a generally understood 
definition in the futures markets.'').
    \48\ See, e.g., CME Group at 8 (``The statute's definition of 
`spoofing' as `bidding or offering with the intent to cancel the bid 
or offer before execution,' is too broad and does not differentiate 
legitimate market conduct from manipulative conduct that should be 
prohibited. The distinguishing characteristic between `spoofing' 
that should be covered by paragraph (C) and the legitimate 
cancellation of other unfilled or partially filled orders is that 
`spoofing' involves the intent to enter non bona fide orders for the 
purpose of misleading market participants and exploiting that 
deception.''); HETCO at 7 (``The Commission should describe, with 
specificity, what trade practices constitute spoofing, particularly 
where this is not a concept familiar to the markets for commodities 
and derivatives.''); ICE at 8 (generally discussing the practice of 
``spoofing'' as defined in paragraph (C) of Section 747 may capture 
legitimate trading behavior).
    \49\ See, e.g., API at 14 (``The Commission has requested 
comment on whether a ``partial fill of an order * * * necessarily 
exempts that activity from being defined as `spoofing.' The answer 
is yes.''); HETCO at 8 (``A partial fill of an order or series of 
orders should not exempt the activity described above from being 
defined as `spoofing'.'').
---------------------------------------------------------------------------

2. Commission Guidance
    New CEA section 4c(a)(5)(C) prohibits any trading, practice, or 
conduct that ``is, is of the character of, or is commonly known to the 
trade as, ``spoofing'' (bidding or offering with the intent to cancel 
the bid or offer before execution).'' To violate section 4c(a)(5)(C), a 
market participant must act with some degree of intent, or scienter, to 
engage in the ``spoofing'' trading practices prohibited by section 
4c(a)(5)(C). In the view of the Commission, a 4c(a)(5)(C) ``spoofing'' 
violation requires that a person intend to cancel a bid or offer before 
execution; therefore, the Commission believes that reckless trading, 
conduct, or practices will not result in violations of section 
4c(a)(5)(C).\50\ Furthermore, orders, modifications, or cancellations 
will not be classified as ``spoofing'' if they were submitted as part 
of a legitimate, good-faith attempt to consummate a trade. Thus, the 
legitimate, good-faith cancellation of partially filled orders would 
not violate section 4c(a)(5)(C). However, a partial fill does not 
automatically exempt activity from being classified as ``spoofing.'' 
When distinguishing between legitimate trading involving partial 
executions and ``spoofing'' behavior, the Commission will evaluate the 
market context, the person's pattern of trading activity (including 
fill characteristics), and other relevant facts and circumstances. For 
example, if a person's intent when placing a bid or offer was to cancel 
the entire bid or offer prior to execution, regardless of whether such 
bid or offer was subsequently filled, that conduct may violate section 
4c(a)(5)(C). Accordingly, under this interpretation, section 
4c(a)(5)(C) will not capture legitimate trading.
---------------------------------------------------------------------------

    \50\ Similar to violations under section 4c(a)(5)(B), accidental 
or negligent trading, practices, and conduct will not constitute 
violations of section 4c(a)(5)(C).
---------------------------------------------------------------------------

    This ``spoofing'' prohibition covers bid and offer activity on all 
registered entities, including all regulated futures, options, and swap 
execution facilities, including all bids and offers in pre-open periods 
or during other exchange-controlled trading halts. ``Spoofing'' also 
includes, but is not limited to: (i) Submitting or cancelling bids or 
offers to overload the quotation system of a registered entity, (ii) 
submitting or cancelling bids or offers to delay another person's 
execution of trades; and (iii) submitting or cancelling multiple bids 
or offers to create an appearance of false market depth.\51\ However, 
the ``spoofing'' provision is not intended to cover non-executable 
market communications such as requests for quotes and other authorized 
pre-trade communications.
---------------------------------------------------------------------------

    \51\ See, e.g., Trillium Brokerage Services, LLC, Letter of 
Acceptance, Waiver and Consent, No. 2007007678201, from the 
Financial Industry Regulatory Authority (``FINRA'') (issued 
September 12, 2010) for a discussion of a ``spoofing'' case 
involving an illicit high frequency trading strategy. Under their 
``spoofing'' strategy, Trillium entered numerous layered, non-bona 
fide market moving orders to generate selling or buying interest in 
specific stocks. By entering the non-bona fide orders, often in 
substantial size relative to a stock's overall legitimate pending 
order volume, Trillium traders created a false appearance of buy- or 
sell-side pressure. This trading strategy induced other market 
participants to enter orders to execute against limit orders 
previously entered by the Trillium traders. Once their orders were 
filled, the Trillium traders would then immediately cancel orders 
that had only been designed to create the false appearance of market 
activity. The Letter of Acceptance, Waiver and Consent and 
accompanying press release from FINRA can be accessed at https://www.finra.org/Newsroom/NewsReleases/2010/P12195.
---------------------------------------------------------------------------

    As with other intent-based violations, the Commission distinguishes 
between legitimate trading and ``spoofing'' by evaluating all of the 
facts and circumstances of each particular case, including a person's 
trading practices and patterns. Notably, a section 4c(a)(5)(C) 
violation does not require a pattern of activity, even a single 
instance of trading activity can be disruptive of fair and equitable 
trading.

    Issued in Washington, DC, on February 24, 2011 by the 
Commission.
David A. Stawick,
Secretary of the Commission.

Appendices to Antidisruptive Practices Authority--Commission Voting 
Summary; Statements of Commissioners; List of Roundtable Participants 
and Commenters

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn, Chilton 
and O'Malia voted in the affirmative; Commissioner Sommers voted in 
the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed interpretive order regarding disruptive 
practices on designated contract markets or swap execution 
facilities. Congress expressly prohibited three trading practices 
that it deemed were disruptive of fair and equitable trading. 
Today's order provides additional guidance to market participants 
and the public on the trading, practices and conduct that violate 
these statutory provisions. The order also addresses comments 
received by the Commission at the December 2nd roundtable and in 
response to the Advanced Notice of

[[Page 14948]]

Proposed Rulemaking on disruptive trading practices. The order 
addresses the comments by clarifying how the Commission will 
interpret and implement the provisions of Section 747. I look 
forward to hearing from the public in response to this proposed 
interpretive order. The comment letters and staff roundtable were 
extremely helpful in formulating this proposed order.

Appendix III

December 2, 2010 CFTC Staff Roundtable on Disruptive Trading Practices

I. Panel One: Opportunities and Challenges to Fair and Equitable 
Trading

i. Ensuring Fair and Equitable Trading at the Close

ii. Exploring ``the character of'' Spoofing

    a. Panelists: John Hyland--U.S. Natural Gas Fund; Rajiv 
Fernando--Chopper Trading LLC; Adam Nunes--Hudson River Trading 
Group; Cameron Smith--Quantlab Financial, LLC; Liam Connell--Allston 
Trading, LLC; Don Wilson--DRW Trading Group; Joel Hasbrouck--New 
York University; Gary DeWaal--Newedge USA, LLC; Mark Fisher--MBF 
Clearing Corp; John Lothian--John J. Lothian & Company.

II. Panel Two: Rules ``Reasonably Necessary'' To Prohibit Disruptive 
Trading

    a. Panelists: Tom Gira--Financial Industry Regulatory Authority; 
Chris Heymeyer--National Futures Association; Ike Gibbs--
ConocoPhillips; Dean Payton--Chicago Mercantile Exchange; Mark 
Fabian--IntercontinentalExchange; Joe Mecane--New York Stock 
Exchange; Greg Mocek--McDermott Will & Emery; Ken Raisler on behalf 
of Futures Industry Association--Sullivan and Cromwell LLP; Micah 
Green--Patton Boggs LLP; Tyson Slocum--Public Citizen; Andrew Lo--
Massachusetts Institute of Technology.

III. Panel Three: Exchange Perspectives on Disruptive Trading; 
Potential New Disruptive Trading Practices

    a. Panelists: Tom Gira--Financial Industry Regulatory Authority; 
Chris Heymeyer--National Futures Association; Dean Payton--Chicago 
Mercantile Exchange; Mark Fabian--IntercontinentalExchange; Joe 
Mecane--New York Stock Exchange; Andrew Lo--Massachusetts Institute 
of Technology.

Appendix IV

Parties Submitting Comment Letters in Response to Disruptive Trading 
Practices ANPR

A. Flachman
American Petroleum Institute (API)
Argus Media, Inc. (Argus)
Better Markets (BM)
Bix Weir
Chopper Trading, LLC (Chopper Trading)
CME Group, Inc. (CME Group)
Commodity Markets Council (CMC)
David S. Nichols
DeWitt Brown
Edison Electric Institute (EEI)
Emilie Lauran
Futures Industry Association (FIA)
Hess Energy Trading Company, LLC (HETCO)
IntercontinentalExchange, Inc., and ICE Futures U.S., Inc. 
(collectively, ICE)
International Swaps and Derivatives Association, Inc. (ISDA)
Investment Company Institute (ICI)
Managed Funds Association (MFA)
Minneapolis Grain Exchange, Inc. (MGEX)
Newedge USA, LLC (Newedge USA)
Nicole Provo
Peter J. Carini
Petroleum Marketers Association of America (PMAA)
Rebecca Washington
Securities Industry and Financial Markets Association (SIFMA)
U.S. Senator Carl Levin
West Virginia Oil Marketers & Grocers Association (OMEGA)
Working Group of Commercial Energy Firms (CEF)

[FR Doc. 2011-6398 Filed 3-17-11; 8:45 am]
BILLING CODE 6351-01-P

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