UPDATE 1-'Milestone' US oil manipulation case unsettles traders

Fri Apr 20, 2012 4:14pm EDT

* Dutch firm Optiver accused of manipulating oil prices
    * CFTC case one of largest involving oil price manipulation
    * No admission of wrongdoing in settlement approved Thursday


    By David Sheppard	
    NEW YORK, April 20 (Reuters) - U.S. regulators' $14 million
settlement with high-frequency trading firm Optiver over oil
price manipulation in 2007 is a "milestone" victory in their
toughening stance on market malfeasance which is being closely
watched by traders.	
    In its first major case against an algorithmic trader, the
Commodity Futures Trading Commission said late o n Thursday that
a court settlement required the Amsterdam-based firm to disgorge
$1 million in profits and pay $13 million over allegations it
used a rapid-fire tool nicknamed "The Hammer" to influence U.S.
oil prices in 2007.	
    The settlement came two days after U.S. President Barack
Obama proposed a renewed campaign against illegal oil trading
schemes. But the case dates back to the Bush administration's
effort to crack down on surging oil prices in late 2007 and 2008
as crude soared toward a record of nearly $150 a barrel.	
    The CFTC alleged that traders in Optiver's Chicago office
engaged in a practice called "banging the close", in which the
firm attempted to move U.S. crude, gasoline and heating oil
prices by executing a large volume of deals during the final
moments of trading, when exchanges set "settlement" prices.	
    The regulatory agency also alleged that an Optiver official
lied to cover up the purported scheme.	
    The case was viewed as a litmus test of the CFTC's efforts
to get more aggressive over market manipulation, a charge that
has historically been difficult to prove despite mounting
political pressure to take rogue traders to task. Financial
reforms have given it even more leeway to pursue malfeasance.	
    "It's definitely meant as a warning shot from the CFTC to
the industry," said Howard Tai, senior analyst at market
research firm Aite Group.	
    "Will others step out of bounds in the future? Almost
certainly. (But) they need to show that they are trying to get
on top of things to make traders think twice about stepping out
of line."	
    The CFTC launched a major investigation into oil prices in
2008. The Optiver case, announced in July of that year, was the
first to emerge from that effort.	
    "The CFTC will not tolerate traders who try to gain an
unlawful advantage by using sophisticated means to drive oil and
gas futures prices in their favor," David Meister, the CFTC's
enforcement chief, said in a statement.	
    "Manipulative schemes like 'banging the close' harm market
integrity, and false and misleading statements to exchange
officials to cover tracks obstruct the investigative process,"
he said.	
 	
    Optiver, which neither admitted nor denied the CFTC's
allegations as is common in such settlement cases, said it was
"pleased to put this matter behind it".  	
    The settlement barred Christopher Dowson from trading
commodities for eight years, Randal Meijer for four years and
Bastiaan van Kempen for two years. 	
    The company itself was barred for two years from trading
U.S. oil futures in the three minutes before the market closes. 	
    The fine was less than the $19.3 million that Optiver had
set aside for the case in its 2010 annual report.
 	
    High-frequency and algorithmic traders have been watching
the Optiver case closely amid worries that other automated
trading programs could be deemed manipulative, though most firms
define themselves as market makers and liquidity providers
rather than proprietary trading shops.	
    Yusuke Seta, a commodity sales manager at brokerage Newedge
in Japan, said he backed a crackdown, though tougher regulation
was a concern for all traders.	
    "CFTC has reached a milestone, that is what matters," Seta
said.	
    "(But) sometimes it is hard to distinguish the line that
separates manipulation and usual trading."	
        	
    "YOU NEVER KNOW HOW LONG IT'S GOING TO LAST"	
    Optiver, founded as a one-man operation by options trader
Johann Kaemingk in Amsterdam in 1986, was considered a pioneer
in the closely knit high-frequency and algorithmic trading
communities of Amsterdam and Chicago.	
    It has more than 600 employees worldwide, including offices
in Sydney, and says on its website it has "never had a
loss-making year". The firm trades only with its own capital,
and has no clients.	
    The CFTC case revealed emails and phone recordings showing
efforts by traders at Optiver's Chicago branch to "move",
"whack" and "bully" oil prices.	
    According to a CFTC background sheet, van Kempen told an
Optiver trader on March 19, 2007: "You should milk it for right
now because you never know how long it's going to last."	
    The CFTC complaint said Optiver and van Kempen made false
statements to New York Mercantile Exchange compliance officials
in an effort to conceal the alleged scheme.	
    The defendants had attempted to manipulate NYMEX U.S. crude
oil, gasoline and heating oil contracts 19 separate times during
11 days in March 2007, according to the complaint.	
    "Those who seek to manipulate oil or other commodity markets
should know we aren't messing around," CFTC Commissioner Bart
Chilton said. "You manipulate, we are going after you."	
    In a copy of the private company's 2010 annual report
obtained by Reuters last year, the firm reported trading income
of 551.1 million euros (about $800 million) in 2007 and 710.6
million euros in 2008.	
    But trading income fell to 263.7 million euros in 2009 and
377.5 million euros in 2010.	
    	
    LONG TIME COMING	
    Obama on Tuesday called on lawmakers to raise civil and
criminal penalties on individuals and companies involved in
manipulative practices. 	
    The CFTC was keen to trumpet the Optiver settlement on
Thursday, but the long wait between the alleged manipulation and
a settlement illustrates the difficulties faced by regulators.	
    The agency had been criticized after the number of
enforcement cases slumped between 2006 and 2008, just as
commodity markets were attracting more attention from investors
and the public as oil prices soared.	
    But since then the agency has made progress, successfully
lowering the legal bar for what constitutes commodity market
manipulation while winning some important backers.	
    Obama asked lawmakers for more money to fund the agency,
saying they needed to hire "more cops" for market oversight.	
    Last year enforcement cases filed by the CFTC surged 74
percent to its highest level in history. The number of cases has
climbed each year since 2008.	
    In 2010, the CFTC won a $25 million fine from hedge fund
Moore Capital Management for attempting to manipulate settlement
prices of platinum and palladium futures, and for "banging the
close".	
    A major suit against London-based oil trader Arcadia and its
U.S. unit is pending in court.	
    The regulator obtained orders imposing more than $290
million in civil monetary penalties in 2011, and directed the
payment of more than $160 million in restitution and
disgorgement, more than double the prior year.	
    The CFTC is expected to review HFT trading this year and is
seeking more money to update monitoring technology,
following fierce criticism in the wake of the equity market
"flash crash" in May 2010.	
    "As reflected by the court's order, we will seek significant
financial penalties from violators and limitations on their
privileges to trade on markets in the United States," Meister at
the CFTC said in the Optiver statement.
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