RCCM/DV Trading is paying a $5 million penalty and former trader with the firm, Brandon Elsasser, is paying $200,000.
The CFTC reports that it has simultaneously filed and settled charges against Chicago-based Rosenthal Collins Capital Markets (now known as DV Trading), and one of its former traders.
RCCM is accused of “engaging in illegal wash sales in order to generate rebates of exchange fees based upon increased trading volumes,” according to the CFTC, which also charges a former RCCM trader, Brandon Elsasser, with illegal wash sales.
(A wash sale, according to the SEC, occurs “when you sell or trade securities at a loss and within 30 days before or after the sale you: ‘Buy substantially identical securities, [a]cquire substantially identical securities in a fully taxable trade, or [a]cquire a contract or option to buy substantially identical securities.’ ” The Internal Revenue Service (IRS) rules prohibit market participants from deducting losses related to wash sales, SEC officials add.)
RCCM/DV is paying a $5 million civil monetary penalty to settle the charges and Elsasser, who headed DV Trading when it was a high-speed trading division within RCCM, is paying a $200,000 civil monetary penalty.
Elsasser allegedly engaged in illegal wash sales between 2013 and 2015, according to the CFTC. Following that period, RCCM, which was a wholly owned subsidiary of RCG Holdings, changed its name to DV Trading, and DV Trading separated from RCG Holdings on September 1, 2016, the CFTC says.
Certain RCCM traders engaged in “wash” trades in which they were trading with themselves, or each other, instead of other parties, to qualify for order rebates offered by Chicago-based exchange operator CME Group, the CFTC says. Wash trades are harmful because they “create illusory price movements in the market,” according to the regulator.
According to the CFTC, from early 2013 until July 2015 “proprietary traders at RCCM engaged in three different wash trading strategies in order to generate rebates through the Eurodollar Pack and Bundle Market Maker Program … offered by Chicago Mercantile Exchange, Inc. (CME).”
Program contracts provided the “same exposure of existing Eurodollar Bundles (simultaneous buying or selling of 8, 12 or 20 consecutive Eurodollar futures contracts in one transaction) wrapped into a single futures or options contract,” CME officials say. “Under the Program, the amount of the potential rebate credit increased as the Eurodollar Pack and Bundle contracts extend[ed] further out along the yield curve. For example, trading in Eurodollar packs that extend seven years into the future would generate more credits than trading in Eurodollar packs that extend only two years into the future.”
FTF News contacted CME officials for comment about the RCCM/Elsasser affair, asking specifically whether Elsasser and RCCM had exploited alleged flaws in the CME program, and if the CME program was changed as a result of RCCM and Elsasser’s alleged actions. By press time, there had been no reply.
“Certain RCCM traders participated in the Program and discovered that they could earn rebates at their desired pace and quantities simply by self-trading,” the CFTC says. “RCCM traders generated Program rebates by trading against themselves through three different strategies.”
DV Trading says in a statement that it has built a new, better compliance program. “Since becoming an independent entity in September 2016, DV Trading has focused on building a strong infrastructure and culture of compliance,” the statement says.
Renato Mariotti, a lawyer for Elsasser and one of the other involved traders, told Crain’s Chicago Business that they were pleased to put the matter to rest. “As the CFTC noted, we fully cooperated with their investigation, and we are glad that they took this into account,” Mariotti said.
Regarding Elsasser specifically, the CFTC alleges that he “discovered that he could trade against himself in rebate-eligible products and avoid detection using the exchange’s implied matching engine. Elsasser entered orders for several Eurodollar pack butterfly spreads on one side of the market and then entered orders on the opposite side of the market for Eurodollar pack spreads with component legs that contained the same underlying contracts. Using this technique, Elsasser traded against himself and generated rebates that benefitted his trading group and his employer’s house account. As such, Elsasser’s trading constituted fictitious, wash sales….”
(A butterfly spread, according to Investopedia, is an option strategy “combining bull and bear spreads. … Both puts and calls can be used for a butterfly spread.”)
The CFTC “specifically finds that in early 2013, in order to generate the firm’s desired level of rebates apart from actual market conditions, an RCCM trader evaded RCCM’s wash blocking system in order to trade against himself and generate rebates. He continued generating rebates using wash trades until his trading was detected and RCCM tightened its wash blocking system.”
A few months later, according to the commission, “two RCCM traders began engaging in prolonged periods of scratch trading, that is, buying and selling opposite each other, in order to generate the rebates. They continued trading in that manner until the CME informed RCCM that it would exclude trades among RCCM traders from the rebate calculations.”
Shortly after, RCCM trader Elsasser allegedly “discovered a third strategy in which he could trade against himself in rebate-eligible products and avoid detection using the exchange’s implied matching engine to buy and sell contracts.”
The CFTC is charging Elsasser with engaging “in fictitious trading strategies in order to generate rebates from the Program.”
Furthermore, according to the commission, RCCM’s compliance efforts “did not detect or investigate any of these strategies until they were brought to RCCM’s attention by regulatory inquiries…. In total, RCCM earned rebates on approximately 300,000 Eurodollar contracts through more than 8,000 wash transactions while trading in the market maker program.”