UPDATE 1-Trader sues U.S. swap regulator to stop "unfounded" case

Tue Sep 17, 2013 5:53pm EDT

By Douwe Miedema

Sept 17 (Reuters) - A Chicago speed-trading firm sued the U.S. swaps regulator on Tuesday, saying it acted to prevent the agency from bringing an "unfounded" case against it for manipulating futures contracts.

DRW Investments and its founder Donald R. Wilson, for whom the firm is named, filed the lawsuit against the Commodity Futures Trading Commission in the U.S. District Court for the Northern District of Illinois.

"Any claim the CFTC may bring against DRW on this matter would be completely unfounded," the company said in a press release.

DRW has been the subject of a CFTC inquiry for nearly two years and found out about the probe when the CFTC requested documents in August 2011, Craig Silberberg, a DRW employee, said in a declaration filed in support of the case.

In April 2013, the CFTC's Division of Enforcement informed DRW that it intended to recommend that the Commission file an enforcement action, he added.

"DRW therefore understands that the filing of an enforcement action by the CFTC is imminent, unless the Enforcement Division's recommendation is rejected by the Commission," said Silberberg, who oversees some of DRW's trading operations.

The CFTC, which has not yet brought a case, had no immediate comment on the lawsuit.

Calling itself a "principal trading firm," DRW invests its own money in markets like a hedge fund, but without taking on outside clients.

Wilson is a board member of the Futures Industry Association and the head of the FIA's Principal Trading Group, which represents high-frequency traders.

DRW said the CFTC's case was in connection with trading in the IDEX USD3 Month interest rate swap futures contract, an illiquid financial instrument.

These instruments are not traded through the high-frequency trading techniques that DRW uses elsewhere.

The CFTC's case centers on price differences between the swap futures contract, which was listed on the Nasdaq OMX and comparable unlisted swaps during the period from August 2010 to August 2011, according to the complaint.

DRW could affect the price of the listed contract because it was so illiquid, but the fact that the listed contract diverged from the unlisted one did not mean the price was "artificial" as alleged by the CFTC, it said.

DRW has argued publicly that the two contracts were economically different and there was no regulation that said the price of a listed contract should always match its unlisted counterpart, DRW said.

"Accordingly, the CFTC's enforcement action ... would violate DRW's constitutional due process right to receive fair notice ... as well as its right to be free from arbitrary and unreasonable government actions," the complaint added.

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