U.S. regulators are digging into a topic that has been the talk of Wall Street and Washington ever since a controversial Vanity Fair article suggested investors made billions of dollars trading ahead of market-moving news: Are government leaks fueling big profits in the futures market?
For months, the Commodity Futures Trading Commission has been quietly ramping up efforts to hunt for suspicious transactions by using technology to pore through reams of market data, said three people familiar with the matter who asked not to be named because the examination isn’t public. The goal is to assess whether some traders are getting a heads up before the release of key economic statistics or federal agencies’ policy announcements.
The CFTC began the push well before the Vanity Fair story ran in October. Upon reviewing the trades highlighted in the piece, the agency was unconvinced and couldn’t substantiate its insinuations of wrongdoing, said two of the people. The Securities and Exchange Commission reached a similar conclusion, one of the people said.
Still, watchdogs acknowledge that the article spotlighted an issue that risks undermining investor confidence: The futures market hasn’t been policed for insider trading nearly as much as the stock market has.
In theory, that could make the derivatives ideal for traders to take advantage of illicit tips that precede big moves for currencies, oil prices or even broad equity indexes. And news out of Washington, including reports on monthly job growth and President Donald Trump’s tweets, is known to trigger some of the wildest swings in futures markets.
CFTC and SEC officials declined to comment on the Vanity Fair article. But CFTC Enforcement Director Jamie McDonald was adamant that regulators have stepped up their data-crunching to boost market surveillance.
“The early returns on our investments in data analytics have been positive,” he said in a statement. “We expect the longer-term impact of our efforts to be even more substantial, as we continue to prioritize detecting and prosecuting misconduct that can undermine the integrity of our markets, like the various forms of insider trading prohibited in the derivatives and commodities markets.”
Concern that futures traders might be profiting from inside information prompted lawmakers to include a provision known as the Eddie Murphy rule in the 2010 Dodd-Frank Act. The regulation for the first time made it illegal for investors to engage in the type of scheme depicted in the famed 1980s movie “Trading Places,” in which characters played by Murphy and Dan Aykroyd used a leaked government crop report to make millions betting on orange juice futures.
“There’s much more behavior that is prohibited under the new law,” said Geoffrey Aronow, a law partner at Sidley Austin and former head of enforcement at the CFTC. “The new law is a bigger hammer for the CFTC to bring insider trading cases. It’s an incredibly broad provision.”
Yet in the decade since Congress approved Dodd-Frank, there’s little evidence that the CFTC has made much use of the Eddie Murphy rule beyond a smattering of cases. For example, the CFTC accused a broker last year of sharing customers’ confidential investments in energy contracts with a friend and using the friend’s account to make trades.
McDonald, a former federal prosecutor who joined the CFTC in 2017, has made an effort to prioritize insider trading, announcing last year that the agency had formed a specialized task force.
The CFTC now faces more pressure to show results, particularly in ensuring that government leaks aren’t giving some traders an edge. After Vanity Fair published its story, a dozen Democratic lawmakers demanded that the agency, the SEC and criminal authorities investigate the “disturbing reports of suspicious trading in our futures and equities markets” described in the article.
The Oct. 16 piece dubbed the transactions “Trump Chaos Trades” because they were all made shortly before market-moving news -- some of which involved public statements by the U.S. president. The story cited unnamed traders speculating that inside information played a role in five perfectly-timed transactions involving S&P 500 e-mini futures that netted gains of as much as $1.8 billion.
Wall Street widely panned the article. The piece attributed billions of dollars worth of transactions to a single bad actor or group of cheaters, a premise that industry insiders said was an implausible reading of trading data.
CME Group Inc. Chief Executive Officer Terry Duffy, who runs the exchange where the trades purportedly took place, called the story “nonsensical.” Other critics said comments by public figures such as Trump frequently move markets so someone looking for suspicious timing is almost guaranteed to find it.
The story’s author, William D. Cohan, said his article was based on traders with decades of experience alerting him to suspicious transactions.
“I reported what traders were telling me,” he said in an email. “I am pleased the regulators looked into it and I am ecstatic they didn’t find anything.”
Democrats have previously expressed concern that Trump or his aides might be inappropriately sharing market-moving information.
Last year, three senators including Democratic presidential candidate Elizabeth Warren asked the SEC and CFTC to investigate whether there were unusual transactions tied to a June 2018 incident when Trump drove markets higher by tweeting that he was “looking forward” to the jobs report about an hour before its release. At lawmakers’ behest, regulators looked into the matter and didn’t bring a case, according to two people familiar with the matter.
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