Antidisruptive Practices Authority, 14943-14948 [2011-6398]
Download as PDF
<![CDATA[
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
[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]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
Antidisruptive Practices Authority
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed Interpretive Order.
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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 FR 67301, Nov. 2, 2010.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.'').
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.'').
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.'').
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.'').
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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
