Market manipulation undermines the integrity of the price discovery process and fair dealing between market participants. Schemes that influence market prices through means other than legitimate supply and demand forces harm consumers by inflating prices for essential commodities, disrupt production planning and profitability for producers, undermine the utility of futures markets as hedging and price discovery mechanisms, and reduce market liquidity.
The Commodity Exchange Act (CEA) authorizes the CFTC to combat market manipulation, protect market participants from fraudulent or manipulative practices, price distortions, and systemic risk. Whistleblowers that help the CFTC to investigate and prosecute market manipulation schemes can qualify for a CFTC whistleblower award.
The CFTC Whistleblower Program incentivizes whistleblowers to report market manipulation by authorizing an award of 10% to 30% of monetary sanctions collected in market manipulation enforcement actions. This post discusses the CEA’s prohibition of market manipulation, indicia of market manipulations, examples of market manipulation, and tips to report market manipulation.
What is Market Manipulation?
Market manipulation is an intentional exaction of a price determined by forces other than supply and demand intended to deceive traders as to the market’s true judgment of the worth of the commodity. A market manipulation scheme seeks to create an artificial or rigged price in the commodity at issue (a price that does not reflect basic forces of supply and demand).
Many market manipulation cases arise from market “corners” or “squeezes,” through which the alleged manipulator causes artificial price inflation in the futures market or disrupts the normal price convergence between futures and cash markets. When a market manipulator controls a significant portion of the deliverable supply of the underlying commodity, they effectively gain monopoly power, thereby enabling them to force short sellers to settle their contracts at artificially high prices.
What is the CFTC’s Authority to Combat Market Manipulation?
The CEA makes it unlawful to manipulate or attempt to manipulate the market price of any commodity in connection with any swap, or contract of sale of any commodity in interstate commerce, or contract for future delivery on or subject to the rules of any registered entity. See 7 U.S.C. § 13(a)(2).
Proving market manipulation is difficult because prices in commodity markets are naturally volatile, thereby making it complex to distinguish between normal price movements and artificial price distortions caused by manipulation. And determining the “true” or “artificial” price of a commodity is a complex task in that multiple variables affect commodity prices and it requires analyzing the intersection of demand and supply curves under optimal market conditions.
Regulation 180.1, which the CFTC promulgated pursuant to its expanded enforcement authority in the Dodd-Frank Act, prohibits any person, directly or indirectly, in connection with any swap, or contract of sale of any commodity in interstate commerce, or contract for future delivery on or subject to the rules of any registered entity, to intentionally or recklessly:
(1) Use or employ, or attempt to use or employ, any manipulative device, scheme, or artifice to defraud;
(2) Make, or attempt to make, any untrue or misleading statement of a material fact or to omit to state a material fact necessary in order to make the statements made not untrue or misleading;
(3) Engage, or attempt to engage, in any act, practice, or course of business, which operates or would operate as a fraud or deceit upon any person; or,
(4) Deliver or cause to be delivered, or attempt to deliver or cause to be delivered, for transmission through the mails or interstate commerce, by any means of communication whatsoever, a false or misleading or inaccurate report concerning crop or market information or conditions that affect or tend to affect the price of any commodity in interstate commerce, knowing, or acting in reckless disregard of the fact that such report is false, misleading or inaccurate.
17 C.F.R. § 180.1.
The CFTC need not prove specific intent to affect a price or price trend that does not reflect legitimate forces of supply and demand. Instead, a violation can be established by demonstrating recklessness—an action or inaction that so drastically deviates from normal standards of care that it is difficult to believe the actor was unaware of what they were doing.
What are Examples of Market Manipulation?
Marking the Close or Banging the Close
“Marking the close” or “banging the close” is a trading strategy that entails an attempt to influence the closing price of a futures contract by executing orders near the end of the trading day, such as
purchasing a substantial number of futures contracts leading up to the closing range on expiration day followed by the sale of those contracts several minutes before the close of trading. Marking the close can distort market prices, disrupt natural price discovery, and create misleading impressions about market activity.
For example, the CFTC brought an action against a hedge fund and its trader alleging that they attempted to manipulate the price of natural gas futures contracts by deliberately waiting to sell a substantial number of those contracts in the final minutes before the close of trading. On the days when they purportedly attempted to manipulate the prices of natural gas futures, they held large short positions on natural gas swaps. Amaranth Advisors, L.L.C. and its subsidiary settled the charges by agreeing to pay a $7.5 million civil monetary penalty.
Benchmark Rates Manipulation
In a benchmark-rate-manipulation scheme, traders seek to increase or decrease impartial global reference rates for their own financial gain. Some of the techniques or methods commonly employed in these schemes include deliberately submitting inaccurate data to influence the benchmark calculation, executing large trades near the end of trading periods to impact closing prices, coordinating efforts to submit false or misleading data used to calculate the benchmark rate, or engaging in strategic trading activities designed to move the benchmark rate in a desired direction.
In 2024, the CFTC filed and settled charges against energy trading company TotalEnergies Trading SA finding that, to benefit its derivatives positions, it manipulated the market for EBOB-linked futures contracts by affecting the benchmark price for physical EBOB, a type of refined automobile gasoline used primarily in Europe. The value of EBOB-linked futures contracts is determined based on a benchmark price for physical EBOB that is published by the London-based price-reporting service Argus.
TOTSA attempted to manipulate this market for EBOB-linked futures by selling physical EBOB in the Argus brokered market at prices below what buyers indicated they would pay. TOTSA’s sales constituted more than 60% of the volume transacted by all brokered market participants and its transactions were reported to Argus, and incorporated into the Argus EBOB Benchmark. TOTSA maintained a large short position that would increase in value if the reported price of EBOB declined. They attempted to sell physical EBOB at prices that were lower than what buyers indicated they were willing to pay in an attempt to depress the reported price of EBOB, and increase TOTSA’s overall trading profits (by boosting the value of the company’s EBOB-linked short position). TOTSA agreed to pay a $48 million civil monetary penalty.
Some of the largest benchmark rate manipulation cases are associated with USD ISDAFIX benchmark-swap rates, LIBOR, Euribor, and other foreign interest-rate benchmarks. For example, the CFTC ordered Citibank to pay $250 million for attempted manipulation and false reporting of USD ISDAFIX benchmark-swap rates. The CFTC uncovered numerous instances of Citibank’s USD ISDAFIX misconduct through the bank’s exotic traders’ instant messages. The CFTC imposed more than $5.08 billion in penalties in its investigation of global benchmark-rate manipulation. Over $1.8 billion of these penalties was imposed on 6 banks for misconduct relating to foreign-exchange benchmarks, while over $3.21 billion was imposed for misconduct relating to ISDAFIX, LIBOR, Euribor, and other interest-rate benchmarks.
Spoofing Schemes
In a spoofing scheme, individuals use algorithms or other means to outpace other market participants and manipulate markets in their favor. Under the Dodd-Frank Act, spoofing is defined as “the illegal practice of bidding or offering with intent to cancel before execution.”
In a typical spoofing scheme, high-frequency traders use algorithms to place a substantial number of bids or offers on a particular security or commodity with no intention of executing. By placing these bids or offers, the traders create the illusion of demand, which subsequently drives up the trading price. Alternatively, traders also use algorithms to cancel a substantial number of bids or offers, to create the illusion of exchange pessimism. This drives down the trading price. Traders are able to profit from this manipulation by synchronizing their buying and selling with the resultant market fluctuations.
On January 19, 2017, the CFTC charged Citigroup $25 million for spoofing in the U.S. Treasury futures markets and for failing to diligently supervise the activities of its employees and agents in conjunction with the spoofing orders. According to the agency’s Order, Citigroup’s unlawful conduct occurred between July 16, 2011 and December 31, 2012 when five of Citigroup’s traders engaged in spoofing more than 2,500 times.
Engaging in Uneconomic Trading Strategies to Influence Volume-Weighted Average Settlement Price
In the CFTC’s enforcement action In re DiPlacido, a trader of derivative contracts whose value at expiration was based on the daily settlement price of the NYMEX PV or COB electricity futures contracts, was held liable for manipulation for violating bids and offers in order to influence the volume-weighted average settlement price. On Option Expiration Days, the daily settlement price was calculated by determining the weighted average of the prices of all trades executed during the last two minutes of the trading day. The manipulative scheme involved a variety of practices on Option Expiration Days, including:
- selling NYMEX PV electricity futures contracts at prices less than the prevailing price;
- purchasing NYMEX PV electricity futures contracts at prices higher than the prevailing price;
- purchasing NYMEX COB electricity futures contracts at prices higher than the prevailing price;
- entering into a noncompetitive trade; and
- placing large orders for NYMEX Western U.S. electricity futures contracts on the Options Expiration Days.
The CFTC inferred manipulative intent from DiPlacido engaging in uneconomic trading strategies—violating bids and offers—in order to influence prices.
Obtaining Large Positions to Depress Cash Market Prices
In 2015, the CFTC filed a civil enforcement action against Kraft alleging that it violated speculative position limits by holding wheat futures positions in excess of speculative position limits established by the CFTC and the Chicago Board of Trade (CBOT) without a valid hedge exemption or a bona fide hedging need, and engaged in numerous noncompetitive trades in CBOT wheat.
According to the CFTC’s complaint, Kraft allegedly obtained a $90 million long position in wheat futures contracts not because of any bona-fide commercial need for wheat, but instead to depress cash market wheat prices and inflate the futures price of wheat. It did not make financial sense for Kraft to take physical delivery of futures market wheat, which required expensive delivery, transportation, and storage solutions as compared to buying wheat from the local cash market. Plus, futures market wheat was of a lower quality, and Kraft had not taken delivery of futures market wheat since 2002. Kraft allegedly did not have the capacity to store $90 million worth of wheat, or a 6-month supply of 15 million bushels. This scheme appeared to be market manipulation in that Kraft allegedly sent a false signal through its market behavior that it intended to source its wheat from the futures market, so that the transaction was not representative of true supply and demand.
In 2022, Kraft entered into a consent order to resolve the matter that included a $16 million penalty.
Is Short-Selling in High Volume Inherently Manipulative?
No. The Second Circuit held in ATSI Communications, Inc. v. Shaar Fund, Ltd. that “short selling-even in high volumes-is not, by itself, manipulative . . . Aside from providing market liquidity, short selling enhances pricing efficiency by helping to move the prices of overvalued securities toward their intrinsic values . . . In essence, taking a short position is no different than taking a long position. To be actionable as a manipulative act, short selling must be willfully combined with something more to create a false impression of how market participants value a security. Similarly, purchasing a floorless convertible security is not, by itself or when coupled with short selling, inherently manipulative. Such securities provide distressed companies with access to much-needed capital and, so long as their terms are fully disclosed, can provide a transparent hedge against a short sale.”
How Can a Whistleblower Disclose Market Manipulation to the CFTC and Qualify for a Whistleblower Award?
Market manipulation whistleblowers are eligible to receive between 10% and 30% of the monetary sanctions collected in successful enforcement actions. In October 2021, the CFTC awarded $200 million to a whistleblower for providing information that led the CFTC to evidence of wrongdoing concerning the manipulation of financial benchmarks used by global banks.
Under the Dodd-Frank Act, whistleblowers that voluntarily provide the CFTC with original information about violations of the CEA that leads the CFTC to bring a successful enforcement action resulting in the imposition of monetary sanctions exceeding $1 million can qualify for a CFTC whistleblower award. The CFTC Whistleblower Program allows whistleblowers to submit tips anonymously if they are represented by an attorney. The program also allows international whistleblowers to be eligible for awards.
Since 2014, the CFTC has issued approximately $400 million in awards to whistleblowers. The largest CFTC whistleblower awards to date are $200 million, $45 million, $30 million, and $10 million.
Whistleblower disclosures have enabled the CFTC to bring successful enforcement actions against wrongdoers with orders for more than $3.2 billion in monetary relief.
Experienced and Effective Market Manipulation Whistleblower Lawyers
We represent CFTC whistleblowers disclosing a wide variety of market manipulation schemes, including transnational market manipulation schemes.
Call our CFTC whistleblower lawyers today at 202-930-5901 or contact us here to find out if you may qualify for a CFTC whistleblower award. A delay in reporting market manipulation can potentially disqualify a whistleblower from recovering an award or can lower a whistleblower award, so call us today for a free consultation.
CFTC Whistleblower Protection for Whistleblowers Disclosing Market Manipulation
The CFTC Whistleblower Program also protects the confidentiality of market manipulation whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity. Whistleblowers can submit tips anonymously to the CFTC if represented by counsel. Furthermore, the Dodd-Frank Act protects whistleblowers from retaliation by their employers for reporting violations of the CEA to the CFTC.
