A whistleblower typically brings to mind the image of a back-office worker or disgruntled former employee, not a titan of finance.
But Ken Griffin’s Citadel, the operator of a $24 billion hedge fund and a global trading arm, is shattering that mental picture.
The Chicago-based firm has filed a request with the U.S. Commodity Futures Trading Commission for whistleblower status, saying it uncovered unscrupulous trading on futures exchanges beginning in 2013, according to two people familiar with the matter who asked not to be named discussing private matters.
Under the Dodd-Frank Act, whistleblowers who give the government tips that lead to prosecutions can get a substantial bounty: between 10 percent and 30 percent of the recovered amount. Earlier this month, the CFTC awarded a whistleblower, whom it didn’t name, more than $10 million for providing “key original information” that led to a successful enforcement action, the largest in the commission’s history.
In this case, Citadel could not only make some money but also look like a hero helping stamp out manipulation in some of the world’s most important markets. That the firm took matters into its own hands shows how deeply spoofing, the form of cheating at issue here, has penetrated the global marketplace—and how slow regulators and exchanges have been to root it out.
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The Citadel claim relates to Igor Oystacher and his Chicago-based firm, 3Red Trading, which the CFTC sued last year for allegedly spoofing, an illegal bait-and-switch tactic. That case is in the preliminary stages now in a federal court in Chicago. Oystacher has denied the accusation.
Citadel’s claim isn’t even the only one in the Oystacher case. Earlier this week, Matthew Wasko, a former trader at HTG Capital Markets, said during testimony in the case that he had also filed as a whistleblower with the CFTC.
Spoofing in U.S. futures markets became illegal in 2010, when Dodd-Frank took effect. The CFTC invoked that rule when it accused Oystacher and 3Red of engaging in the practice. Spoofers place orders they don’t intend to fill for the sole purpose of moving prices in a direction favorable to their strategy, and then cancel them before they are filled.
While there’s nothing wrong with canceling orders, it’s illegal to place orders with no intention of following through on them.
Citadel’s role as a possible whistleblower emerged in an April 8 hearing in Chicago federal court. Matthew Menchel, a lawyer for Oystacher, was questioning Richard May, a lead quantitative researcher at Citadel. “Citadel filed a whistleblower complaint,” Menchel said, then asked May if that was correct. May said he didn’t know.
Menchel said the claim was filed for Citadel by John Nagel, the general counsel for Citadel Securities, the firm’s market-making unit. Only individuals, and not companies, are allowed to file as whistleblowers, according to CFTC rules.
RESTRICTIONS ON DISCLOSING IDENTITY
Citadel spokesman Zia Ahmed declined to comment.
Christopher Ehrman, director of the CFTC’s whistleblower office, also declined to comment. The government is restricted in many cases from releasing the identity of whistleblowers, though the person can choose to publicly reveal their status at any time without affecting their eligibility to collect an award. There can also be multiple whistleblowers in a single enforcement action.
Both May and Wasko have provided affidavit testimony for the CFTC in the case against Oystacher. May described how Citadel in late 2013 identified unusual losses it was experiencing. After determining that another trader was placing very large orders and then canceling them, the firm created an algorithm it called a “pull swipe detector.”
Using the algorithm, Citadel compiled evidence of what it called spoofing from 2013 to 2015 and presented it to the CFTC and CME Group, owner of the futures markets where much of the alleged spoofing occurred, May said. Citadel sent the two bodies a complaint of spoofing in Standard & Poor’s 500 Index futures as recently as July 2015, May said.