US watchdog the Commodity Futures Trading Commission (CFTC) has slapped a major buy-side firm with fines for setting up a prearranged trade on the Chicago Board of Trade (CBOT) and executing fictitious sales.
The US$250,000 rap across the knuckles went to BlackRock Institutional Trust after an employee deliberately crossed BlackRock orders in ten-year US Treasury Note Futures spreads, intentionally putting the firm on both sides of the transaction.
The CFTC said twice in 2010 a BlackRock trader entered buy and sell orders with two different futures commission merchants (FCMs) near the same time, with the orders to be executed on the CBOT floor.
Both times, the buy and sell orders were for the same specific amount, with one order designated “all or none” so that it was certain to cross with the other.
During one of the transactions, the CFTC said the BlackRock trader “engaged in pre-execution communications with an account executive at the selling FCM, with the purpose that the FCM sell to the paired bid from BlackRock”. The CFTC found this as evidence the BlackRock employee engaged in two prearranged trades, which were both noncompetitively executed and fictitious sales.
At the same time, the CFTC said J.P. Morgan Securities had agreed to pay a US$140,000 penalty for confirming the execution of the prearranged trade.
Both BlackRock and J.P. Morgan have been ordered to “cease and desist from further violations of the Commodity Exchange Act (CEA) and CFTC regulations”.