CFTC says CME directed to beef up 'spoofing' enforcement

WASHINGTON (Reuters) - The top U.S. derivatives regulator said on Thursday that his agency has directed exchange market operator CME Group Inc to beef up its enforcement staff and develop plans to detect manipulative “spoofing” tactics.

Assistant U.S. Treasury Secretary Tim Massad testifies before a House Financial Services subcommittee hearing on Capitol Hill, in this handout photo taken on March 30, 2011. President Barack Obama on November 12, 2013 will name Massad as the next head of the Commodity Futures Trading Commission, according to a White House official. REUTERS/Image courtesy of the House Oversight and Government Reform Committee/Handout via Reuters

Commodity Futures Trading Commission Chairman Tim Massad discussed the agency’s recommendations to CME in prepared testimony before the U.S. Senate Agriculture Committee, which oversees the regulator.

CME should “develop strategies to identify instances of spoofing, and, as appropriate, pursue actions against perpetrators,” he said, following a CFTC review of the market operator in November that uncovered deficiencies in its disciplinary program during the 2012-13 period.

Massad’s comments come nearly a month after London-based trader Navinder Singh Sarao was arrested and charged with market manipulation linked to the May 6, 2010 flash crash.

Sarao was trading on CME’s platform, and although officials there detected some questionable trading activity in 2009, his alleged manipulation continued through this year, according to U.S. authorities.

On the day of the flash crash, criminal authorities said the CME had ask Sarao if he was placing orders in good faith.

Massad told reporters on the sidelines of the hearing that CME has been “very responsive” to the CFTC review’s findings.

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CME Executive Chairman Terry Duffy, who also testified before the same panel on Thursday, told Reuters that the findings in the CFTC’s review were not related to its oversight of Sarao.

“We’ve had strategies to detect market disruption since inception,” Duffy said.

“The CFTC has told us in the past...can you hire more investigators?...and we’ve been hiring more investigators.”

Some critics have questioned why regulators at the CME and the CFTC took so long to detect Sarao’s allegedly manipulative trading.

Ultimately, it was a whistleblower to led the CFTC to Sarao.

Massad pleaded with lawmakers in a letter Thursday not to curtail the agency’s powers to react quickly to market events.

Duffy said the previous communications that CME’s self-regulatory staff had with Sarao were not related to the flash crash in any way.

“We were in touch with him on May 6, 2010,” he said. Those communications referred to activities in 2008 and 2009 in which Sarao was putting in orders prior to the market opening, Duffy noted.

“We sent him a letter of warning,” he said. “That activity stopped... It had nothing to do with the flash crash.”

“It was just the damnedest timing,” he added.

Reporting by Sarah N. Lynch; editing by Susan Heavey and Christian Plumb