Regulated markets do not condone ‘flying’ or other ‘fake volume’ tactics


Global capital markets have come a long way in the past decade, another sign of the interconnectedness of all global markets in our modern commercial setting. Investors today think nothing of investing in overseas markets, when just ten years back, one would have to jump through hoops in order to find a broker with an acceptable network of counterparties to buy directly in an overseas exchange. Safety, soundness, and security, however, are benefits of regulatory oversight, concepts that can get lost in today’s virtual processes.

A case in point is that regulators are vigilantly monitoring their markets for signs of abuse and for “bad actors” attempting to manipulate markets or others’ perceptions of what is transpiring. In a recent case, the US Commodities Futures Trading Commission (CFTC), after years of pursuing such a transgression, reached an agreement with BGC Financial, LP and GFI Securities, LLC, two New York-based inter-dealer brokers, to pay $25 million in fines for engaging in fraudulent FX trading.

The fraudulent acts had to do with a process known as “flying”, where, according to TheTradeNews, “both institutions posted fake bids and offers on their electronic trading platforms for FX options, and then communicated the fake trades to clients, referred to as ‘printing’, in order to dupe clients into transacting at times and prices they otherwise might not have.”

In the CFTC’s press release, James McDonald, CFTC Director of Enforcement, stated:

Brokers and other intermediaries play a critical role in our markets. The CFTC is committed to protecting the integrity of our markets by ensuring they are held accountable for fraudulent misconduct.

The CFTC release goes on to state the intent of these two brokers, as being:

By “flying prices” and “printing trades,” BGC and GFI brokers intended to create an illusion of greater liquidity and, in some circumstances, tighter spreads in EFX options on the platform and induce clients to transact in EFX options via the platform at times and prices at which they otherwise might not have.

This practice was not an occasional misstep here or there or a random quote from time to time. Court papers alluded to the brokers “frequently reported fake trades, including thousands based on “flown” bids and offers, to encourage clients to enter genuine follow-up trades that would generate commissions”.

These transgressions were performed by Wall Street firms with conscious knowledge of regulatory oversight. What might take place in a totally unregulated market, where anything goes, and investors must make decisions based on whatever information is available, whether manipulated or not. Such a “Wild West” atmosphere existed in the binary options space, where billions of dollars of consumer losses were sustained. The same environment also pervades the 200+ network of global crypto exchanges, which has resulted in supported claims that 95% of reported volumes are considered “fake”.

In the case of BGC and GFI, the two brokers are also being fined from other quarters for another $12.5 million. The brokers have also been ordered “to enhance their internal controls and procedures, to appoint a monitor, and to cease and desist from violating the Commodity Exchange Act and CFTC regulations”.

The sooner these types of corrective processes and fines apply to unregulated sectors of our global financial markets, the sooner market integrity will become an accepted fact rather than a manufactured perception. The sooner that “wash trading” – the “selling and re-purchasing the same security or substantially the same security to generate activity and increase the price” – is both policed and banished, the sooner institutional investors will make inroads into an emerging market.

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