JPMorgan admits to misconduct, pays $920M penalty

By: Jayson Derrick
Jayson Derrick
Jayson lives in Montreal with his wife and daughter, loves watching hockey, and is on a lifelong quest to… read more.
on Sep 30, 2020
  • JPMorgan admitted to illegally spoofing certain trading markets.
  • The bank will pay a $920 million penalty.
  • Spoofing consists of entering an order with no intention of having it filled.

JPMorgan Chase & Co. (NYSE: JPM) reached an agreement with U.S. regulators that involves acknowledging misconduct and paying a hefty fine for manipulation.

Spoofing is illegal

The U.S. Justice Department, the Commodity Futures Trading Commission, and the Securities and Exchange Commission were all investigating JPMorgan for manipulating precious metals prices and Treasury markets, The Wall Street Journal reported. The bank agreed to a deferred prosecution agreement through which it acknowledged it engaged in spoofing.

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JPMorgan will pay a $920 million penalty. Here is how the fine compares to the company’s most recent earnings report.

Spoofing consists of a trader entering a large order with the intention of canceling it almost after it was posted. The initial order is meant to deceive other market participants and push the prices in one direction.

Four ex-JPMorgan precious-metals traders were charged in 2019 with spoofing and racketeering but they have all pleaded not guilty. But two other traders pleaded guilty in 2018 and 2019 to crimes related to spoofing of precious metals futures.

“The conduct of the individuals referenced in today’s resolutions is unacceptable and they are no longer with the firm,” said Daniel Pinto, co-President of JPMorgan Chase and CEO of the Corporate & Investment Bank. “We appreciate that the considerable resources we’ve dedicated to internal controls was recognized by the DOJ, including enhancements to compliance policies, surveillance systems and training programs.”

Outlawed In 2010

Spoofing was made illegal as part of the 2010 Dodd-Frank financial overhaul law. Not only that, regulators and prosecutors had greater access and ability to punish manipulative trading behavior, according to WSJ.

The Justice Department is directly involved in punishing illegal behavior, as opposed to just individual regulatory bodies. Individuals that are found guilty face prison time.

Despite the illegal nature of the trading strategy, some traders openly boasted about their activities. According to prosecutors, one trader bragged in a 2012 message they are spoofing the market to create “a little razzle-dazzle to jule the algos.”

Algos, or trading algorithms, were unable to identify if an order is genuine or not. When a trader is up against a machine, they would often enter orders on electronic trading platforms and hope the prices would trigger part of an algorithm code into believing supply or demand for an asset was changing.

The end result of JPMorgan’s spoofing activity was other market participants losing $106 million in the Treasury debt and Treasury futures market. The financial damage in the precious metals market was $205 million.

Despite the fact that JPMorgan was on the receiving end of a record-setting CFTC enforcement, shares of the bank were trading higher in Tuesday’s after-market session.

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