U.S. District Court for the Northern District of Illinois Judge Amy J. St. Eve issued several rulings in connection with a CFTC motion for a preliminary injunction against a proprietary trading firm and its founder who allegedly had engaged in "spoofing." The CFTC argued that the defendants attempted to manipulate prices by placing orders for futures that they did not intend to fill. The CFTC argued that this strategy allowed them to trade futures in quantities and at prices that otherwise would not have been available to them in the market. 

Defendants argued that the "spoofing" provision of the Commodity Exchange Act was "facially vague" because it prohibits activities that are not subject to clear definition. The defendants sought to exclude evidence of past payments they had made to European and U.S. regulators to settle actions for similar alleged misconduct. The CFTC sought to introduce this evidence to demonstrate that the defendants had engaged in a prior pattern of "spoofing." 

At the preliminary injunction hearing, Judge St. Eve granted in part and denied in part the CFTC's motion to exclude the defendants' "vagueness" argument (the Order precludes further information regarding what parts were accepted and what were excluded) and denied the defendants' motion to exclude evidence of prior exchange investigations and related settlements against them. The Judge also denied the CFTC's motion to exclude the testimony and opinions of a Florida International University College of Law professor on behalf of the defendants, a prominent expert on futures law well known in the industry. Finally, the Judge denied a motion by the defendants to strike the firm's previous Chief Compliance Officer from the CFTC's witness list.

Commentary

Whether the CFTC's allegations are ultimately vindicated, the case itself illustrates two issues that merit attention. First, the prohibited activity hinges on the meaning of a colloquial term: "spoofing," an activity with a fuzzy red line that constitutes a "gray area" of the law, as the defendants put it. The area remains gray precisely because the CFTC favors resolving such a question through an amorphous evaluation of the "facts and circumstances" – an exercise that prevents market participants from knowing the line ex ante.

Second, the defendants allege that this case arose after certain competitors (i.e., algorithmic trading firms) lodged complaints with the CFTC. In antitrust, where prohibited conduct is subject to similarly unclear language, complaints by competitors often are viewed as attempts to cripple rivals and subvert, rather than promote, competition. See Joshua Wright, Prof. of Antitrust Law, George Mason University School of Law and former FTC Commissioner, "Supreme Court Should Tell FTC to Listen to Economists, Not Competitors, on Antitrust," Forbes (Mar. 14, 2016). Likewise, skepticism sometimes may be in order when considering complaints from competitive trading firms.

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