JPMorgan admitted to illegally deceiving certain commercial markets.
The bank will pay a fine of $920 million.
Spoofing consists of entering an order without the intention of having it executed.
JPMorgan Chase & Co. (NYSE: JPM) has entered into an agreement with U.S. regulators that includes an admission of wrongdoing and the payment of a hefty fine for tampering.
Spoofing is illegal
The U.S. Department of Justice, the Commodity Futures Trading Commission and the Securities and Exchange Commission investigated JPMorgan for manipulating precious metals prices and financial markets, the Wall Street Journal reported. The bank agreed to a plea agreement to delay prosecution, admitting that it had participated in spoofing.
JPMorgan will pay a fine of $920 million. Here is a comparison of the fine with the company’s most recent earnings report.
Spoofing is when a dealer enters a large order with the intent to cancel it almost immediately after it is released. The initial order is intended to deceive other market participants and drive prices in one direction.
Four former JPMorgan precious metals dealers were charged with spoofing and racketeering in 2019, but they have all pleaded not guilty. Two other traders pleaded guilty to crimes related to the counterfeiting of precious metal futures in 2018 and 2019.
“The conduct of the individuals referred to in today’s resolutions is unacceptable and they are no longer part of the Company,” said Daniel Pinto, Co-President of JPMorgan Chase and CEO of the Corporate & Investment Bank. “We appreciate that the significant resources we have devoted to internal controls have been recognized by DOJ, including the improvement of compliance policies, monitoring systems and training programs.
Outlawed in 2010
Spoofing was made illegal as part of the Dodd-Frank Financial Audit Act 2010. Not only that, but according to the WSJ, regulators and prosecutors had greater access and the ability to punish manipulative trading behaviour.
The Department of Justice is directly involved in punishing illegal conduct, as opposed to only individual regulators. Persons found guilty of illegal conduct are threatened with imprisonment.
Despite the illegal nature of the trading strategy, some traders openly boasted about their activities. According to prosecutors, one trader boasted in a 2012 message that he was deceiving the market in order to “create a little deception to confuse the Algos”.
Algos, or trading algorithms, were not able to detect whether an order was real or not. When a trader deals with a machine, he often enters orders on electronic trading platforms, hoping that prices will trigger part of the algorithm code in such a way that he believes supply or demand for an asset will change.
The end result of JPMorgan’s spoofing activity was that other market participants lost $106 million in the market for government debt and treasury futures. The financial loss in the precious metals market was $205 million.
Despite the fact that JPMorgan was at the end of a record-breaking CFTC enforcement, the bank’s shares traded higher in Tuesday’s post-market session.