JPM settlement
- 82newsbulletin
- Oct 24, 2020
- 2 min read
Written by Raymond & Nicolas
Earlier this week, JP Morgan Chase & Co reached an agreement with the US Department of Justice in the case of market manipulation.The manipulation involves precious metal index futures (namely gold and silver) prices along with treasury bills futures. A future is a financial instrument allowing the buyer (seller) to lock in a price at which it will buy (sell) an asset in the future. The gain or loss made on those contracts therefore depends on the variance of the value of an underlying asset (here gold, silver or T-bills), thereby creating profitability for investors.
The investment bank is set to pay $920 millions, the largest amount of money ever penalized: $436m in fines, $311.7m as a restitution of their gains and a further $172m in disgorgement (to deter future violations). Regulators set this bill for not only this single case but JPM’s underperformance and passiveness of preventing such financial crimes in history.
The violations occurred between 2009 and 2016, when traders inside the bank manipulated the supply and demand of commodities to set a price that fitted their bets better. To make it, they would place a large amount of orders on the commodity - which would impact the market price of said commodity - and very soon discard the orders without executing them. When doing so, it has almost no influence on ordinary investors, nevertheless, some of the automatic high-frequency trading systems would catch this as a valid trading signal by algorithm, therefore be mislead to a wrong trading direction and lose their money. This trick to deceive high-frequency traders is known as ‘spoofing’, and the Security and Exchange Commission forbids such manipulative practices.
A total of three federal agencies investigated JP Morgan: the Department of Justice, the SEC and the Commodity Futures Trading Commission, in what has become the largest ever settlement for spoofing. They prosecuted JPM with mainly two evidences : trading records attained from market, and the chat record by the involved persons showing that they had openly talked about their illegal stategies with schadenfreude for those deceived traders who had lost hundreds of millions of dollars.
The 15 persons identified as the manipulators are “no longer with the firm,” declared by JPM’s co-president Daniel Pinto. He admitted all related allegations and thanked the regulators for recognizing JPM’s growing effort to prevent such illegal practices. However, at the same time JPM is still trapped in another scandal of a misuse of the coronavirus stimulus funds by its employees, casting doubts on its ‘sincere’ pledge to improve the internal compliance supervision system.
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