CFTC Fines Trader and Firm for Spoofing in Futures Contracts

The Commodity Futures Trading Commission (CFTC) has sanctioned Brett Falloon and Flatiron Futures Traders LLC for spoofing practices in U.S. futures markets. The misconduct took place between May and December 2022 on the Chicago Mercantile Exchange, involving the E-mini S&P 500 and E-mini Nasdaq 100 contracts.

The order issued by the CFTC describes how Falloon placed orders on behalf of Flatiron that he intended to cancel, creating the appearance of market activity. These spoof orders were placed on one side of the order book, while he simultaneously submitted genuine orders on the opposite side that he did intend to execute. Once the genuine trades were filled, he canceled the spoof orders.

Regulators noted that Falloon's spoof orders often represented a significant share of the visible order book, in some cases outnumbering his legitimate trades by five to one. His genuine orders were often aggressive, crossing the bid-ask spread to be filled immediately. The spoofing activity was intended to mislead other participants into placing trades that benefited his genuine orders, allowing him to secure faster execution, larger fills, or more favorable prices.

The CFTC concluded that this conduct was designed to manipulate the perception of supply and demand in the market. As part of the settlement, Falloon and Flatiron must jointly pay a $200,000 penalty. Falloon was also handed a one-year ban on trading commodity interests. Both parties were ordered to cease and desist from further spoofing violations under the Commodity Exchange Act.

The case underscores the CFTC's ongoing efforts to clamp down on disruptive trading practices in derivatives markets. Spoofing, which was formally prohibited under the Dodd-Frank Act, has been a consistent area of enforcement for the regulator, given its potential to distort market integrity and harm other participants.