U.S. prosecutors on Monday announced that they had settled charges against three European banking giants, HSBC, UBS and Deutsche Bank, for manipulating the markets for precious metals, including gold and silver, and filed charges against eight people, including some of their former traders.
The case is the largest crackdown so fa, on what Wall Street has increasingly complained is abuse of sophisticated computer algorithms to illegally place and quickly cancel bids on commodity contracts, a practice known as “spoofing.” In these schemes, traders trick their competitors by creating artificial demand that drives prices up or down to their benefit. (After a spoofer, for example, places a sell order, other investors may worry that the price of an asset is about to fall and sell. The spoofer then cancels their initial order and buys the asset at a reduced price.)
The practice has become more problematic as trading is increasingly driven by computers and executed at blink-of-an-eye speeds by high-frequency traders, market experts have said. The computer algorithms react to the artificial demand before a human can sniff out the trick.
“Spoofing is a particularly pernicious example of bad actors seeking to manipulate the market through the abuse of technology,” James McDonald, the enforcement director for the Commodity Futures Trading Commission, a markets regulator, said in a statement. “These cases should send a strong signal that we at the CFTC are committed to identifying individuals responsible for unlawful activity and holding them accountable.”
Deutsche Bank agreed to pay a penalty of $30 million, UBS $15 million and HSBC $1.6 million. The settlements included no admission of guilt.
In a statement, HSBC, which received the smallest fine and was credited by the CFTC for cooperating with the investigation, said it was “pleased to have resolved this issue.” UBS said it “has long since remediated the conduct.” Deutsche Bank said it “has provided substantial and proactive cooperation with the government’s investigation and has enhanced controls and surveillance to help ensure that the underlying conduct does not occur in the future.”
The Justice Department also announced criminal charges against eight individuals, including traders from London, New York City and Chicago. The manipulative trading went on for years, according to the complaints, starting in some cases in 2008. The traders and their co-conspirators allegedly placed hundreds, and in some cases, thousands of orders that they did not intend to complete, according to the Justice Department.
“Conduct like this poses significant risk of eroding confidence in U.S. markets and creates an uneven playing field for legitimate traders and investors,” John P. Cronan, the acting assistant attorney general for the Justice Department’s Criminal Division, said in a statement.