JPMorgan to pay nearly $1B for metals market manipulation

https://www.bloomberg.com/news/articles/2020-09-23/jpmorgan-is-set-to-pay-1-billion-in-record-spoofing-penalty

by SomaticPirate • 6 years ago

189 103 6 years ago

Maybe I'm misunderstanding the case here, but why is spoofing orders a crime? If the answer is: because algorithmic trading computers get screwed up and try to front run and buy the asset when they think there are buyers - I just can't feel sympathetic. Who exactly is the victim here?

mrfox321• 6 years ago

It's similar to questioning the morality of a scam artist who hires his friends to pretend to bid on something in front of the victim to influence them or drive up the price.

doublesCs• 6 years ago

Actually not a bad analogy, thank you.

the_jeremy• 6 years ago

It's worth pointing out that this holds true for the inverse scenario: dark pools (trading between large firms off-exchange) are legal. The metaphor would be an artist selling only to his friends, and not putting every piece for sale for everyone.

abduhl3• 6 years ago

Spoofing distorts the market by making it appear that there is much more liquidity and demand or supply. Distorted markets are, theoretically, bad for various reasons. Commodities markets are underpinned by the idea of real price discovery happening: supply meeting demand at an agreeable price. Fake supply or demand undercuts this goal.

Algorithmic traders just happen to be the ones taken advantage of here because they move fastest. If there were no algorithmic traders and everything was done manually the distortion in the market would still exist. An imperfect analogy: imagine you go out to the gas station to buy gas and see that there is a line of cars at the gas station charging $2.00/gal but there is no line of cars at the gas station charging $2.01/gal. You go to the $2.01/gal gas station, because you see that there's huge demand and you need gas now. As you drive back, you pass all of the $2.00/gal cars and realize they are all empty. You've been cheated by spoofing.

Whether this is paternalistic or not is up for debate.

uzakov5• 6 years ago

Spoofing distorts the market by making it appear that there is much more liquidity and demand or supply. Distorted markets are, theoretically, bad for various reasons. Commodities markets are underpinned by the idea of real price discovery happening: supply meeting demand at an agreeable price. Fake supply or demand undercuts this goal.

Does this logic apply to non-financial field? If someone (person X) creates a fake demand for a SaaS service Y and company Z builds service Y, should X pay money because Z decided to build Y, without a written contract between X and Z?

lostmsu3• 6 years ago

Would not requiring every order to have validity duration attached (and not cancelable) be a better solution, than creating legal limitations, that can not be automated?

trappist• 6 years ago

It only succeeds at manipulation, for the most part, because of assumptions created by the prohibition that the apparent liquidity is genuine liquidity. I trade crypto on unregulated exchanges where spoofing is such a familiar phenomenon that traders and their algorithms assign little or no meaning to it, and it has no observable effect. The prohibition is what makes it work.

hogFeast2• 6 years ago

You are correct. This was semi-frequent before 2008 but the spoofers were often individuals, and the exchange operators usually tolerated them because they did so much volume (Paul Rotter being the most famous).

After 2008, the big algo traders got involved and spoofing was a huge issue because algos are often based on market depth. And the law was changed overnight (and the heavy-handed way that the federal govt came down on individuals, often at the request of algo traders, is unusual).

Just generally: "spoofing" was always seen as unethical but it rarely mattered before 2008 because humans learned fairly quickly that when someone piled in orders around the price, it wasn't necessarily real. Equally, what we have also seen is that certain order types that were being used to conceal intention from algos (concealing your intention is a fundamental part of how markets operate) were also being lumped in with "spoofing".

On JPM specifically, everyone knew they were spoofing for decades before this. I am not aware of an IB that did spoofing like JPM, and the reason why is that they did a ton of volume in these markets and used spoofing to control the price.

raziel27013• 6 years ago

It's illegal because the exchanges are the victims. If this was being done to retail traders there would be no crime. The message here is that it's illegal to mess with the algos but not illegal for algos to mess with your order.

SpeckOfDust2• 6 years ago

It's crazy that this kind of thing is tolerated in financial markets. It should be criminal to manipulate markets like this.

Time and again I'm convinced that it is extremely difficult to succeed as a retail trader. The odds of you succeeding given false signals like this are just depressingly low. And this is just one instance where the prosecution was able to prove wrongdoing.

missedthecue• 6 years ago

It's not tolerated? They're paying a billion dollars in fines for doing it.

jjoonathan• 6 years ago

How much did they make from it?

hu3• 6 years ago

If companies can get away with repeatedly breaking the rules then it is not forbidden. Just taxed in the form of fines.

moneytide1• 6 years ago

"The accord would end probes by the Justice Department, the Commodity Futures Trading Commission and the Securities and Exchange Commission into whether traders on JPMorgan’s precious metals and treasuries desks rigged markets, two of the people said."

So $1B paid will stop further investigations? Meaning it can continue to manipulate and the fee is just the cost of doing business?

ponker• 6 years ago

You use italics for the word “billion” but JPMorgan doesn’t.

ddoran• 6 years ago

The shareholders of JP Morgan are paying the fine. Not the bad actors behind the market abuse.

chabes• 6 years ago

If they are making more than a billion from manipulating the markets, the billion dollar fine is part of the business plan.

klyrs• 6 years ago

But where's the law and order? Do the executives and traders get tackled, beaten, strangled and shot a dozen times in the back? Nope. Their employer gets fined and they keep their paychecks and bonuses.

okprod• 6 years ago

JPM probably made a lot more than that fine. First week orientation in my friend's MBA program before classes started was a session about ethics. He thought it would be about being ethical, but the professor said as businesses for any risky decision they should weigh potential profit versus penalty/punishment, because if it makes financial sense to pursue something, even an unethical endeavor, any penalties/fines are justified.

nradov• 6 years ago

You shouldn't need any convincing. The only way any trader (retail or otherwise) can consistently achieve above market risk-adjusted returns is by exploiting an information asymmetry. Essentially you would have to do your own proprietary research to find information that other traders don't have.

The vast majority of retail traders who have better returns than an index fund are just lucky, not skilled. Sometimes you can flip a coin ten times and come up heads every time.

blantonl2• 6 years ago

The probability of heads coming up 10 times in a row is a 1/1024 chance

thrownaway9542• 6 years ago

it is criminal. if you did it, you would be thrown in a cell for 30 years for wire fraud. remember that in america, the rules are different for corporations as there is plausible deniability for the board... as such, only fines are ever enforced which are taken into consideration when making such moves. jpmorgon might have to pay a 1B fine, but they might have made more than 5B in the transaction.

summitsummit4• 6 years ago

the rules are different for corporations as there is plausible deniability for the board

can you expound on this?

jpmorgon might have to pay a 1B fine, but they might have made more than 5B in the transaction.

why don't they just make ill gotten gains illegal?

smabie3• 6 years ago

Retail traders are simply not affected by things like this. It's the HFT/market making firms that would be most damaged.

The reason why retail traders rarely succeed is because the ones that are good move to the institutional level (as it is almost impossible to support yourself by trading alone). The bad ones invariably trade down their portfolio until they are forced to get a real job.

This isn't to say that you shouldn't retail trade, but rather, don't rely on it as your sole source of income (unless you have at least 2mm-5mm dollars to trade with).

spaced-out• 6 years ago

Retail traders are simply not affected by things like this. It's the HFT/market making firms that would be most damaged.

I won't believe this without a citation to an academic study. This affects the underlying price of raw materials, which has a direct impact on the stock price of companies using those materials. The stock price of many of those companies has a direct impact on people's retirement and the solubility of pension funds, among other things.

White collar crime does has victims.

M5x7wI3CmbEem10• 6 years ago

you reckon trading careers are on a decline? many of my former classmates pursued Trading over the once-fashionable M&A

bradj2• 6 years ago

Isn’t this evidence that it isn’t tolerated? The bank is paying a billion dollars and three of the traders involved, including the executive, are facing criminal fraud charges in a RICO case.

hnracer5• 6 years ago

It's crazy that this kind of thing is tolerated in financial markets

It's not tolerated, that's why they're being fined

subsubzero• 6 years ago

I don't know, I usually do pretty well as a retail trader. I do it on the side and stick to areas I know well, like tech. I usually make 10-15% of my total yearly income trading medium term. But that being said, stuff like this stacks the deck in the favor of big players. My personal frustration is activist investors/large short sellers who make a large short and then come up with a erroneous article to drop the stock and reap the benefits(Andrew Left - "Citron research") comes to mind.

RantyDave• 6 years ago

Don't talk to me about that.

gmuslera• 6 years ago

Not sure if its related, but this piece of news (https://www.nytimes.com/2013/07/21/business/a-shuffle-of-alu...) made the headlines several years ago.

beambot2• 6 years ago

While submitting and then canceling orders isn’t illegal, it is unlawful as part of a strategy intended to dupe other traders.

So if you build an algorithm that "learns" this behavior, it's OK since human intent is removed?

tombert• 6 years ago

IANAL, but I would think that it would be your (as the person deploying and maintaining this algorithm) responsibility to make sure this algorithm doesn't do anything illegal or disingenuous, either by putting safeguards into it or by constantly tracking it to make sure it doesn't do something bad.

willdearden• 6 years ago

You are legally responsible as if you had submitted the orders yourself.

beambot2• 6 years ago

I understand that... But as stated, the orders themselves are not illegal. It all hinges on intent of "your strategy to dupe other traders", but I fail to see how the algorithm creator would understand a black-box strategy developed by the algorithm. Eg let's say they algo was some form of reinforcement learning; it's not clear to me that you could even represent the policy space in a human-interperable way. All you have is inputs & outputs -- the AI has no "intent" beyond it's objective function -- say expectation maximization or risk minimization.

tootie• 6 years ago

Writing the algorithm is the intent. Same as hiring a hitman.

alexbiet• 6 years ago

They made $5B and payed $1B as fine. Pocketed $4B and gov got their cut.

blantonl2• 6 years ago

As they say on WSB... this is the way :)

huac• 6 years ago

Where do you see $5B? Per WSJ and CFTC:

The total fine includes a penalty of $437 million, restitution of $311 million and disgorgement of $172 million, the CFTC said. Disgorgement is the requirement to pay back profits that were illegally earned.

It appears that they made less than $200M in profit (spoofing is usually a relatively low margin trade).

tibbydudeza• 6 years ago

They probably made more than a billion USD in profit. Just the cost of doing "business".

smabie3• 6 years ago

They definitely did not. Spoofing orders isn't going to let you post 1bn. Instead, it will only slightly/moderately improve the alpha of your existing trading operations.

bradj2• 6 years ago

The entire precious metals desk did $250 million in profit a year. I doubt spoofing is responsible anything close to a majority of that.

x87678r2• 6 years ago

To be clear the biggest losers from spoofing are HFTs and other market makers. This action is not to directly protect retail traders or normal 401k investments. By protecting the HFTs and MMs they make the market more liquid for everyone, which is good for big investors but still not important for retail traders.

02020202• 6 years ago

...just dont ask about the silver...

H8crilA• 6 years ago

Well, they've been running the biggest silver operation for a while, including the SLV ETF.

donor20• 6 years ago

Wow - Don't mess with the high frequency traders! There must be some big money behind these types of enforcement actions! What's crazy is the algos try to push around the price themselves but I suppose it is legal because it is a computer? Remember flash orders? Quote stuffing to generate delays for arbitrage?

bleepblorp4• 6 years ago

The sick thing about these kind of scams is how much top-tier human talent has been sucked up by the financial sector, essentially to find ways to scam people legally (or at least without getting caught).

It doesn't say much for society's conception of value that there's more money to be made through finding ways to squeeze more revenue out of socially useless financial transactions rather than by solving real problems.

bob332122• 6 years ago

It is an unfortunate aspect of capitalism. Making investments is much easier than making actual things, so more people do it. Lucky there is a counter ballance in the system . If 100% of the population started investing only, the one person to start building would get all the investment. You can see it now with TSLA and NKLA. All these "professional investors" realized that sustainable transportation is a real thing and it is our future. At the end of the day Elon could be far richer than any investors.

hnracer5• 6 years ago

Making investments is much easier than making actual things, so more people do it

A talented person will make as much money or perhaps more money in software engineering than financial services. Most people in financial services make very little money, 60k-150k being a common range.

raziel27013• 6 years ago

Are you not aware that NKLA is a fraud company? I don't think that's a good example of what we want people to do.

Traster2• 6 years ago

It’s not only that making investments is easier. Look at my position in the market, I can work in a hedge fund building out their trading platform and earn a minimum of 2-3x what I would earn doing a similar job at an engineering company. Now you would expect that to be the reverse - there is a flood of investors and relatively few people actually making things, so an engineer could be making a premium by making things. That is absolutely not the case though.

hnracer5• 6 years ago

The overwhelming majority of talent in financial services is working to serve paying customers and to trade legitimately and legally on financial markets.

There are occasional scams like this in financial services, just as there are occasional scams in any industry. To uniquely demonize financial services as a result is not fair.

bleepblorp4• 6 years ago

It was not my intention to malign the huge numbers of rank-and-file FIRE-sector people, like customer service agents across the entire sector, who are just working to put food on their own tables.

I'm thinking more of things like hedge funds, HFT outfits, and the groups that devised synthetic mortgage-backed securities, that put ivy league-level talent towards socially useless and/or economically dangerous activities.

We'd all be better off if the people with the quantitative and social skills to be effective in these spaces put their talents towards things like carbon capture or battery R&D rather than e.g. finding ways to con people into pouring money into hedge funds that under-perform the markets.

meisel• 6 years ago

The widespread irresponsibility of people in the financial industry led to the 2008 housing crisis. Not just a few bad apples.

roenxi3• 6 years ago

... socially useless financial transactions ...

But we don't know if that is true. The old societies that didn't have those financial transactions were objectively pretty terrible and not the sort of place any of us would choose to live. We're using the same people as back then the only changes are systems and research. Writing off the major control system is hasty!

It isn't always good, but having the smartest people choosing what does/doesn't get financed and what amount of effort to dedicate is, fundamentally, extremely socially valuable. Notwithstanding that this particular case which is a scam in anyone's books.

rhexs• 6 years ago

Yes, the early 90s, back before HFT, was an objectively terrible time. I shudder to think of having to live through them again. Imaging having to pay $5 for a stock trade instead of $0. Life changing.

bfrog• 6 years ago

I could say the same about ad tech

Mc_Big_G• 6 years ago

As long as the profits are more than the penalty, this will continue to be business as usual.

yalogin• 6 years ago

Why aren't there any jail terms in this case? I am 100% sure they are fined much less than the profit they made on it. Unless people are jailed, let me be precise here, unless the CEO is jailed for knowingly leading the scam it will not stop. There is no incentive for them to do financial fraud as long as they are just fined.

summitsummit4• 6 years ago

i think that's the point. it's all a big club and we're not part of it.

Gys• 6 years ago

I assume this market is global, do other countries and companies felt the effects as well. Why do other country’s justice departments not fine them as well?

JPMorgan to pay nearly $1B for metals market manipulation

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