(Reuters) -
U.S. regulators claimed their first victory in a four-year old effort to crack
down on oil market manipulation on Thursday, announcing a $14 million
settlement with high-frequency trading firm Optiver.
In a ruling
that came just two days after U.S. President Barack Obama proposed a renewed
campaign against illegal oil trading schemes, the Amsterdam-based company
agreed to disgorge $1 million in profits and pay a $13 million civil penalty
over allegations it used a rapid-fire tool nicknamed "The Hammer" to
influence U.S. oil prices in 2007.
It was the
first case brought by the Commodity Futures Trading Commission (CFTC) in its
2008 effort to curb market malfeasance, launched as prices soared toward a record
near $150 a barrel in the middle of that year.
The case
alleged that traders in Optiver's Chicago office reaped a $1 million profit by
engaging in a practice called "banging the close", in which the firm
attempted to move U.S. oil prices by executing a large volume of deals during
the final moments of trading.
While far
from the agency's largest fine, the case was viewed as an important milestone
in the CFTC's efforts to get more aggressive over market manipulation - a
charge that has historically been difficult to prove, despite mounting
political pressure to take rogue traders to task.
"The
CFTC will not tolerate traders who try to gain an unlawful advantage by using
sophisticated means to drive oil and gas futures prices in their favor,"
David Meister, the CFTC's enforcement chief, said in a statement.
"Manipulative
schemes like ‘banging the close' harm market integrity, and false and
misleading statements to exchange officials to cover tracks obstruct the
investigative process."
Optiver,
which neither admitted nor denied the CFTC's allegations as is common in
settlement cases, said it was "pleased to put this matter behind it".
The
settlement bars traders Christopher Dowson, Randal Meijer and Bastiaan van
Kempen from trading commodities for eight years, four years and two years,
respectively. Two of the three defendants have since left the firm.
The order
also limits the entire company from trading U.S. oil futures in the three
minutes prior to the market close for the next two years.
The fine is
less than the $19.3 million that Optiver had set aside for the case in its 2010
annual report.
"YOU
NEVER KNOW HOW LONG IT'S GOING TO LAST"
Optiver,
founded as a one-person operation by options trader Johann Kaemingk in
Amsterdam in 1986, is considered a pioneer within the close-knit high-frequency
and algorithmic trading communities of Amsterdam and Chicago.
It has more
than 600 employees worldwide, including offices in Sydney, and says on its
website it has "never had a loss-making year". The firm trades only
with its own capital, and doesn't have any clients.
The CFTC
case revealed emails and phone recordings showing efforts by traders at
Optiver's Chicago branch to "move," "whack" and
"bully" oil prices.
According
to a CFTC background sheet, van Kempen told an Optiver trader on March 19,
2007: "You should milk it for right now because you never know how long
it's going to last."
The CFTC
complaint said Optiver and van Kempen made false statements to New York
Mercantile Exchange (NYMEX) compliance officials in an effort to conceal the
manipulative scheme.
The
defendants had attempted to manipulate NYMEX U.S. crude oil, gasoline and
heating oil contracts on the 19 separate times during 11 days in March 2007,
according to the complaint.
"Those
who seek to manipulate oil or other commodity markets should know we aren't
messing around," said CFTC Commissioner Bart Chilton. "You
manipulate, we are going after you."
In a copy
of the private company's 2010 annual report obtained by Reuters last year, the
firm reported trading income of 551.1 million euros (about $800 million) in
2007 and 710.6 million euros in 2008.
But trading
income fell to 263.7 million euros in 2009 and 377.5 million euros in 2010.
Based on
reported personnel expenses at the firm and a staff of 600, the average annual
salary was about 153,000 euros in 2010.
LONG TIME
COMING
President
Obama on Tuesday called on lawmakers to raise civil and criminal penalties on
individuals and companies involved in manipulative practices.
But while
the CFTC was keen to trumpet the Optiver settlement on Thursday, the long wait
between the alleged manipulation and a settlement illustrates the difficulties
faced by regulators.
"As
reflected by the court's order, we will seek significant financial penalties
from violators and limitations on their privileges to trade on markets in the
United States," Meister at the CFTC said.
High-frequency
trading has come under scrutiny in commodity markets in recent years following
a series of violent and seemingly inexplicable price moves that many traders
have blamed on its growth. But most of the CFTC's outright manipulation cases
still revolve around human trades.
In 2010 the
CFTC won a $25 million fine from renowned hedge fund Moore Capital Management
for attempting to manipulate settlement prices of platinum and palladium
futures, also for "banging the close". Another major suit against
London-based oil trader Arcadia and its U.S. unit is pending in court.
The CFTC is
expected to review HFT trading, which has come in for fierce criticism since
the equity market "flash crash" in May 2010.
The
settlement was approved on Thursday by Chief Judge Loretta Preska of the U.S.
District Court in Manhattan.
The case is
CFTC v. Optiver US LLC et al, U.S. District court, Southern District of New
York, No. 08-06560.
(Additional
reporting by Karey Wutkowski, Sarah Lynch and Alexandra Alper in Washington,
D.C.; Editing by Bernard Orr and Robert Birsel)
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