Trading Firms Beware: Those That House Spoofers Can Be Held Strictly Liable

Elise Fleischaker Industry News, Neurensic Blog

cmegroupIn US tort law there is a rigid legal doctrine known as ‘strict liability’ which is frequently used by consumers to hold manufacturers of defective products legally responsible for any harm caused by their products.  Consumers who bought and used the product and were injured are able to file suit against the manufacturer and seek damages without having to prove that the manufacturer had reckless, negligent, or bad faith intent in producing the product (hence, the rigidity of the doctrine).

Much to the dismay of trading firms, this legal doctrine has now found its way into the world of financial regulation.  The CME Group recently announced that it held Geneva Trading strictly liable for the actions of two of its traders who had allegedly engaged in spoofing-like activity, and ordered the firm to disgorge trading profits of $91,241.  

The disciplinary action against Geneva Trading marked the first time that CME Group has ordered disgorgement of profits based on strict liability.  The CME utilized its powers under CME Rule 433 and Market Regulation Advisory Notice (“MRAN”) RA1517-5 to prosecute the enforcement action, and has thereby set a new precedent where the exchange is not required to prove fault, negligence, or intention in order to hold trading firms liable for manipulative trading activity that occurred within their four walls.

Trading firms should be aware that CME’s MRAN  RA1517-5 requires not only the supervision of natural persons, but also “any automated trading systems … operated by any party.” As a result, trading firms may also be held strictly liable for failing to supervise manipulative or disruptive trading activity generated by automated trading systems (“ATSs”) that they employ.

How should trading firms that want to avoid be held strictly liable respond to this development?

They should dedicate the time and resources necessary to implement effective pre-trade risk controls and software change management programs that are in line with the FIA’s recommended best practices.  They should also utilize a modern trade surveillance system that enables compliance staff to efficiently identify potential manipulative trading activity so that they may take action before such activity develops into a huge regulatory nightmare.