The Commodity Futures Trading Commission said yesterday that it plans to crack down on insider trading in the futures market.
In a study mandated by Congress, the CFTC found the potential for abuse by employes of firms concerned with the commodities underlying futures contracts and by employes of firms that publish market predictions. However, it found "insufficient evidence" of insider trading to recommend any change in the law.
Rep. Neal Smith (D-Iowa), one of those who ordered the study after failing to get support for a law banning insider trading in commodities, said yesterday, "I wanted it comparable to" Securities and Exchange Commission regulations. " . . . This is the first time anyone has admitted they needed some action on insider trading. But it needs to go further."
The SEC, which has a much tougher position on insider trading, recently succeeded in getting a law passed tripling the penalties for violations.
The CFTC plans to propose rules to limit insider trading by exchange officials and members of self-regulatory organizations. But it observed that "the greatest potential for public customers to be harmed directly by trading on material, nonpublic information arises from the current practice of dual trading under which floor brokers who execute transactions for public customers are permitted simultaneously to trade for their own accounts." Dual trading is prohibited in the securities and stock options markets.
The CFTC already has a rule prohibiting brokers from executing orders for their own accounts ahead of customer orders, because the broker then would profit from the customer. For example, if the broker gets an order for 100 contracts of March wheat when the market is quiet, he could benefit by executing his own order first, knowing that the customer's order will push the market price up.
The CFTC admits that it is difficult to enforce the rule against this type of trading because of poor record-keeping in the commodity pits. Although stock transactions are stamped with the time the trade is made, the commodity exchanges have refused to adopt such a system, claiming it would interfere with trading. The CFTC said it will propose a minute-by-minute trade-timing system instead of the 30-minute system now in effect. The current system does not allow detection of precise sequences of transactions, the study noted.