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The US futures regulator, the Commodities and Futures Trading Commission (CFTC) has said Chicago-based broker DV Trading will settle charges for $5 million after several of its traders engaged in illegal trading strategies termed ‘wash trading’ in the market. DV Trading is a high speed trading firm that used to be part of Rosenthal Collins.

The illegal trading activities took place between 2013-15. Wash trading involves traders executing trades with each other in order to realise other incentives. In this case they wanted to earn rebates being paid out by CME Group. The brokers were trading in the Eurodollar market and were making their money through the Eurodollar Pack and Bundle Market Maker Program offered by the CME.

At the time, the firm was still trading under the name of Rosenthal Collins. It broke away to begin trading as DV last year. The CFTC says the traders evaded the firm’s existing wash blocking systems, already in place.

One of the traders involved, Brandon Elsasser, who has left DV Trading, paid $200,000, according to the CFTC. The other two traders have not been named. The CFTC says Elsasser “engaged in fictitious trading strategies in order to generate rebates from the program.”

In total, RCCM earned rebates on approximately 300,000 Eurodollar contracts through more than 8,000 wash transactions while trading the market maker program, the CTFC said.

Wash traders are considered harmful to the market, because their activity creates the illusion of price movements in the market. According to US lawyer Gary DeWaal, at Katten Muchin Rosenman:

“A wash trade is a type of fictitious trade where a transaction or series of transactions give the appearance of bona fide purchases or sales, but in fact are entered into without the intent to take a bona fide market position or to expose the transactions to market risk or price competition.”

Typical examples include trading in the same product or expiration month, with the knowledge that the orders are not intended to take any market risk, or buying and selling between accounts that have common beneficial ownership. Evidence of some degree of pre-arrangement of the trade, or that the trader had reasonable knowledge that a wash result would be achieved, can be sufficient for regulatory proceedings to be brought against a trader.

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Stuart Fieldhouse

Stuart Fieldhouse has spent over 20 years in journalism and financial communications, including six years as a wealth management correspondent for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong.

Stuart has worked as head of content at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Stuart continues to work with hedge funds, private banks, stock exchanges and other financial institutions on their communications, data and marketing requirements.

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