University of Houston Finance Professor Craig Pirrong analyzed a recent U.S. District Court for the Southern District of New York determination that a Chicago trader and his firm had neither manipulated nor attempted to manipulate the price of certain interest rate swaps.
The CFTC alleged that the trader Donald R. Wilson and his firm had "manipulat[ed] IDEX swap futures by entering large numbers (well over 1000) of orders to buy the contract during the 15 minute window used to determine the daily settlement price." Professor Pirrong, who had initially commented on the case in September 2013, concluded that the CFTC incorrectly believed that cleared futures and uncleared swaps are equivalent, and that Mr. Wilson, therefore, should have entered quotes equal to swap yields. Professor Pirrong stated that the "advantage of being short the future should lead to a difference between the futures yield and the swap yield." According to Professor Pirrong, Mr. Wilson was correct in "not enter[ing] quotes into the futures market that were equal to swap yields."
Professor Pirrong stated that the:
"CFTC is alleging that apples and oranges are the same, and that if you bid or offer apples at a price different than the market price for oranges, you are manipulating."
Professor Pirrong questioned why the CFTC "chose this case to make its stand on manipulation," saying that "the case was fundamentally flawed–and that's putting it kindly."
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