CFTC Sues CME-Why This Matters

Posted by Jeff Carter
on February 22nd, 2013

The CFTC is suing CME ($CME) over information leaks coming out of the New York Mercantile Exchange. To the average individual, it looks like a relatively small suit that doesn’t have big implications. If you are a trader, and trade with any substantial position size at all, it’s a pretty important issue and you want to see everyone get to the bottom of it right away.

Commodity Futures Trading Commission (Photo credit: Wikipedia)

The confidence in the public marketplace is broken. It’s been broken by a variety of things. The latest was Jon Corzine committing unprosecuted fraud against his own customers. Government agencies that regulate marketplaces have to ensure there is public confidence in markets.

Here is the alleged allegation.

Two CME employees funneled information about trading on Clearport, the over the counter (OTC) trading arm of the exchange. They did this over an extended period of time, and funneled it to one particular broker. The broker is unnamed. Most traders would like to know who the heck it is in the interest of transparency.

Why is this important?

Because CME also publishes a trade register. Members can look at the trade register the next day to see who traded with whom. In the old pit trading days, we knew instantaneously because traders had to call out their trades and say “who they were”. If a pit broker was acting on behalf of a big broker, the news spread fast throughout the pit on what was taking place.

Now, imagine if you were a big player in the oil and had knowledge of what your competitors were doing in both the public marketplace and the over the counter marketplace. You’d have more information than the market and an unfair advantage. The SEC calls it insider trading. If you knew the traders cash position, and their futures position, it’s possible that you could run the market against them and push them to liquidate-costing them money. If you were really good, and like the traders position, you could take the opposite side when they liquidated and make a lot of money.

Clearly, CME management didn’t tell these two guys to offer up sensitive information. It may be possible that they didn’t know what they were doing-but I doubt it. It’s only an allegation at this point and everything has to be proven so we will see.

Just like the SEC, the CFTC selectively prosecutes cases. It doesn’t bring them all so it must be confident it has a winner. Gary Gensler is no fan of CME, and neither are commissioners like Bart Chilton. Anytime they can publicly embarrass or handcuff the exchange, they do.

My biggest question is why did the CFTC take so long to bring the suit? This whole thing went down back in 2008. Does that mean we can expect Corzine to be taken to court in 2016?

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