CFTC charges TFS-Icap with fraud

The Commodity Futures Trading Commission has charged FX interdealer broker TFS-Icap with fraud and supervision failures for communicating fake FX options bids and offers as well as fake FX options trades on its proprietary electronic trading platform, Volbroker, as well as over the phone and instant messaging.

The CFTC also charges Ian Dibb, chief executive of TFS-Icap, and Jeremy Woolfenden, head of emerging markets broking, with supervisory failures for either encouraging the practice or for knowingly allowing the practice to continue.

“We are committed to policing the integrity of our markets and to ensuring that pricing information communicated to market participants accurately reflects supply and demand,” says James McDonald, director of enforcement at the CFTC. “As this case shows, we will continue to vigorously enforce the law and to hold accountable not just the company, but also the individuals responsible.”

Flying prices

The CFTC complaint filed in the US District Court for the Southern District of New York alleges that from approximately 2008 to 2015 brokers at TFS-Icap’s offices in New York and London routinely attempted to deceive clients on their Volbroker platform with ‘flying prices’, a practice that consists in representing clients with bids and offers at a particular price level when in reality no institution had bids or offers at that level.

“These brokers would fly bids and offers on Volbroker by posting them under one of the various “TFS” aliases (usually, TFSNY or TFSLDN),” reads the complaint filed with the court. “Because the platform was anonymous, traders could not tell the difference between bids and offers that were flown by the brokers and bids and offers that were made by an actual trading institution.”

The complaint also alleges that Woolfenden explicitly encouraged brokers to fly prices and that Dibb knew of the practice but failed to take appropriate steps to prevent it.

TFS-Icap was formed in 2000 with the merger of the over-the-counter FX options divisions of TFS and Icap to create an independent intermediary in currency options with voice broking and electronic broking liquidity.

Fake trades using aliases

In addition to presenting clients with fake prices the CFTC alleges that between 2008 and 2015 TFS-Icap brokers also routinely communicated or printed fake trades when in fact no such trades had occurred.

As a result of the practice, known as ‘printing’, ‘spoofing’ or ‘calling’ a trade, traders were induced to place real trades.

TFS-Icap brokers hoped that when they ‘printed’ a trade, market participants would respond with requests to ‘follow on’ – ie, trade at the level the broker had falsely represented was trading

CFTC

“TFS-Icap brokers printed trades on Volbroker by using one TFS alias to aggress on a price posted under another TFS alias, causing a flash on the traders’ Volbroker screens and signalling to them that a trade had occurred when one had not actually occurred,” reads the complaint.

“TFS-Icap brokers hoped that when they ‘printed’ a trade, market participants would respond with requests to ‘follow on’ – ie, trade at the level the broker had falsely represented was trading,” continues the CFTC’s filed complaint.

The CFTC says that the false impression of liquidity created by TFS-Icap brokers caused traders to transact more via TFS-Icap than they would have if prices were not flown or printed.

Struggling EM broking business

The complaint outlines that, following a February 2007 trip to TFS-Icap’s struggling Latin American business in New Jersey, London-based Woolfenden wrote a memo to senior TFS-Icap officials in which he recommended that LatAm brokers fly prices.

“Indeed, the memo suggested that flying prices was a critical way to win more business,” reads the CFTC complaint.

“Woolfenden not only recommended that the LatAm brokers fly prices, but that they fly ‘tight’ prices that had a higher chance of getting hit by the traders. Woolfenden acknowledged the ‘risk’ involved in such a practice – specifically, the risk that the flown prices would be hit and the brokers would not be able to find an actual counterparty – and therefore suggested that the brokers ‘prepare excuses’ to be given to the traders that hit the flown prices.”

When two co-managers on the LatAm desk were reluctant to adopt the practice of flying prices, the court document explains that Woolfenden had them stripped of their managerial responsibilities and replaced with a veteran London broker.