Editorial: JPMorgan fined US$920M for market manipulation

Gold in a Bank of England vault in 2011. Credit: Bank of England.

With the relentless stream of bad news bombarding us these days, we need to take comfort where we can, so it was nice to see evidence that some level of justice can prevail.

After a lengthy investigation, the Commodity Futures Trading Commission in the U.S. has fined JPMorgan Chase & Company and its subsidiaries, JPMorgan Chase Bank and J.P. Morgan Securities LLC, US$920 million for market manipulation that took place over nearly eight years. The fine is the largest in the CFTC’s history, and with any luck, will discourage rogue trading behavior in the future.

According to the CFTC, from at least 2008 through 2016, traders on JPMorgan’s treasuries desk placed orders on one side of the market that they had no intention of ever executing in order to create the illusion of buy and sell orders to affect prices. The practice — called “spoofing” — has been prohibited since 2010 after it was banned under the Dodd-Frank financial reform law.

“JPM, through numerous traders on its precious metals and Treasuries trading desks, including the heads of both desks, placed hundreds of thousands of orders to buy or sell certain gold, silver, platinum, palladium, Treasury note, and Treasury bond futures contracts with the intent to cancel those orders prior to execution,” the CFTC stated in a Sept. 29 press release. “Through these spoof orders, the traders intentionally sent false signals of supply or demand designed to deceive market participants into executing against other orders they wanted filled. According to the order, in many instances, JPM traders acted with the intent to manipulate market prices and ultimately did cause artificial prices.”

The order also found that J.P. Morgan Securities LLC (JPMS), a registered futures commodities merchant, “failed to identify, investigate, and stop the misconduct” the CFTC stated, adding that “despite numerous red flags, including internal surveillance alerts, inquiries from CME and the CFTC, and internal allegations of misconduct from a JPM trader, JPMS failed to provide supervision to its employees sufficient to enable JPMS to identify, adequately investigate, and put a stop to the misconduct.”

The financial penalty is broken down into three parts. JPMorgan must pay US$436.5 million in fines, US$311.7 million in restitution and more than US$172 million in disgorgement.

“Spoofing is illegal – pure and simple,” CFTC Chairman Heath Tarbert stated. “This record-setting enforcement action demonstrates the CFTC’s commitment to being tough on those who intentionally break the rules, no matter who they are.”

The derivatives regulator noted that the manipulative and deceptive conduct “involved hundreds of thousands of spoof orders in precious metals and U.S. Treasury futures contracts” on the Commodity Exchange, Inc., the New York Mercantile Exchange, and the Chicago Board of Trade.

“The order finds that JPM’s illegal trading significantly benefited JPM and harmed other market participants,” the CFTC said.

James McDonald, the director of CFTC’s Division of Enforcement, noted that the record monetary penalty “sends the important message that if you engage in manipulative and deceptive trade practices you will be caught, punished and forced to give up your ill-gotten gains.”

Some observers might argue that the bank’s response was less than apologetic.

“The conduct of the individual’s referenced in today’s resolutions is unacceptable and they are no longer with the firm,” JPMorgan’s co-president Daniel Pinto said in a statement. “We appreciate that the considerable resources we’ve dedicated to internal controls was recognized by the DOJ (Department of Justice), including enhancements to compliance policies, surveillance systems and training programs.”

One of the harshest critics of the settlement, Better Markets, weighed in with a press release of its own. The Washington, D.C.-based non-profit organization, which was founded after the 2008 financial crisis “to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again,” said the “sweetheart settlement” was “little more than a slap-on-the wrist” and the fine amounted to “little more than 10% of what the bank made in the last three months of 2019 when it earned a total of $36.4 billion.”



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