Oct 1, 2020 - Economy

Breaking down JPMorgan's record $920 million fine for "spoofing"

Felix Salmon

Illustration of dollar bill as a medieval stockade — Illustration: Sarah Grillo/Axios

Traders always aspire to "best execution" — if they're buying or selling a certain asset in the market, they want to get the best possible price. The problem is that high frequency traders (HFTs) make that extremely difficult.

Why it matters: One time-honored (yet illegal) tool for trying to outwit the HFTs is "spoofing." That's where a trader enters a series of fake orders that she has no intention of filling, to fool the HFTs about the supply and demand in the market.

Driving the news: JPMorgan has been fined $920 million for spoofing in commodity markets and Treasury bonds.

The CFTC, the lead agency levying the fine, calculated a curiously specific $172,034,790 as the amount that JPMorgan made from the spoofing, along with an equally specific "$311,737,008 in market losses." No indication was made of how those sums were arrived at.
The fine includes "restitution" of $205,992,102, to go into a "JPM Victim Compensation Settlement Fund." It's unclear who will ultimately receive that money, but it is certain to be sophisticated institutional investors who traded willingly at a given price.

Reality check: Spoofing might sometimes feel like a victimless crime, but it does deter institutions from trading, and therefore reduces liquidity and price discovery.

The bottom line: This fine is deliberately large to deter any other institutions from trying something similar. But so long as the HFT sharks are infesting the market waters, the big institutions are still going to be hesitant to swim freely.

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Breaking down JPMorgan's record $920 million fine for "spoofing"

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