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US regulators order $26 million in penalties for a scheme called banging the close, which was employed to manipulate the prices of futures contracts.
By Michelle Smith– Exclusive to Palladium Investing News
The Commodity Futures Trading Commission (CFTC), an agency responsible for regulating US futures and options markets, alleged that from November 2007 to May 2008, Mr. Pia attempted to manipulate the settlement prices for NYMEX palladium and platinum futures contracts using a strategy called “banging the close.” At the time, Pia was a top portfolio manager for Moore Capital Management, which was trading over $15 billion in assets.
Pia’s strategy
The CFTC’s definition of banging the close is “a manipulative or disruptive trading practice whereby a trader buys or sells a large number of futures contracts during the closing period of a futures contract… in order to benefit an even larger position… .”
Pia’s strategy, according to the CFTC, was to execute a large number of market-on-close buy orders. Either directly or through execution clerks employed by Moore Capital Management, Pia would inform a trader of the need to place anywhere between 20 to 100 buy orders. These orders were given with directions indicating that Pia wanted to push up the settlement prices. To help ensure the desired results, the trader would wait until the last ten seconds of the closing period to relay the orders to the floor clerk in the trading pit.
Settlement prices for palladium and platinum futures contracts are calculated based on the volume-weighted average price of all transactions conducted during the two minute closing period each day, which spans from 12:58 and 1:00 pm for palladium. The CFTC alleges that the last second orders from Pia accounted for a significant portion of the volume during this determining period and the reason why was because he was attempting to manipulate the prices in these two thinly traded, relatively illiquid markets.
A source at the National Futures Association (NFA) said that this type of market manipulation has been going on for a long time, but it is often difficult to catch. Still, he says, the exchanges employ people to monitor the trading pits in attempts to identify this type of behavior. And the strategy employed by Mr. Pia would have certainly been a red flag, he added. In this case it was reportedly complaints from other traders that tipped off the regulators.
Settlements
Last week, without admitting or denying any of the allegations against him, Pia submitted an offer of settlement and the CFTC accepted. In addition to a $1 million civil penalty, Pia is also subject to a list of regulations. Among them, for five years, he is required to attend training programs annually, he is subject to stricter reporting and record-keeping obligations, and he is obligated to cooperate with a monitor whose services he is responsible to pay for. Pia is also permanently barred from trading during any closing period and from ever trading any CFTC regulated palladium or platinum products.
This follows a settlement last April in which Moore Capital Management, Moore Capital Advisors and Moore Advisors were ordered to pay $25 million for Pia’s trading scheme. The CFTC asserts that the companies attempted to manipulate settlement prices and they failed to have adequate supervisory systems and procedures in place. Like Pia, his former employer settled without admission or denial of guilt and the companies were also subject to other stipulations on future operations.
Attempts to obtain information from the CFTC about the amount of financial harm or gain that resulted from Pia’s manipulative trading were unsuccessful. However, the source at the NFA said it is probably near impossible to put forth that type of information in numerical figures, but any attempts to jeopardize the integrity of the market are harmful, he said.
The Pia settlement comes at a time when the CFTC is applauding the adoption of new anti-manipulation and anti-fraud rules and has reiterated its commitment to impose significant sanctions on violators.
Disclosure: I, Michelle Smith, hold no direct investment interest in any company mentioned in this article.