Australian Commodities Trader Pleads Guilty to Spoofing on U.S. Futures Exchange
A commodities trader at an Australian proprietary trading firm (Trading Firm A) pleaded guilty on Dec. 26, 2018 to spoofing in connection with his fraudulent and deceptive trading activity in the E-mini S&P 500 futures contracts market on the Chicago Mercantile Exchange (CME).
Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division and Special Agent in Charge Jeffrey S. Sallet of the FBI’s Chicago Field Office made the announcement.
Jiongsheng (“Jim”) Zhao, 31, of Sydney, Australia, pleaded guilty before U.S. District Judge John J. Tharp Jr. of the Northern District of Illinois to one count of spoofing. Zhao was extradited to the United States on Nov. 16 and made his first court appearance on Nov. 19. Sentencing is scheduled for July 19, 2019 before Judge Tharp.
“For almost four years, Jim Zhao placed thousands of phony orders for E-mini S&P 500 futures contracts that he never intended to execute—all in an effort to fraudulently move the market to his own advantage,” said Assistant Attorney General Benczkowski. “The Department and our law enforcement partners will use every tool at our disposal to identify and prosecute those who engage in manipulative trading activity on U.S. markets.”
As part of his plea, Zhao admitted that from approximately July 2012 through March 2016, he placed thousands of orders for E-mini S&P 500 futures contracts on the CME, a commodities exchange operated by CME Group Inc., that, at the time Zhao placed the orders, he intended to cancel before execution (the Spoof Orders). Zhao admitted that typically he engaged in this trading strategy when he already had an order for E-mini S&P 500 futures contracts pending in the market that he did want to execute, but that was not being filled (the Primary Order). Zhao admitted that he would place the Spoof Orders on the opposite side of the market from the Primary Order with the goal to induce other market participants to trade against his Primary Order. This trading strategy, Zhao admitted, was intended to inject materially false and misleading liquidity and price information into the E-mini S&P 500 futures contracts market by placing the Spoof Orders in order to deceive other market participants about the existence of supply and demand. The Spoof Orders were designed to artificially move the price of E-mini S&P 500 futures contracts in a direction that was favorable to Zhao, and to the detriment of other market participants. In pleading guilty, Zhao admitted that he placed the Spoof Orders in order to generate profits (or mitigate losses) for himself and Trading Firm A, and that Trading Firm A kept a percentage of Zhao’s trading profits, ranging at various times from 20 percent to 50 percent.
According to admissions in the plea agreement, in approximately March 2016, the CME began an investigation into Zhao’s trading activity in connection with the E-mini S&P 500 futures contracts. As part of that investigation, Zhao submitted to a CME interview, and provided the CME with written responses to explain his trading activity, including three specific examples of Zhao’s trading activity. In a written response submitted to the CME, Zhao stated that all of the orders identified in the three examples were part of either a “scalping” or spread trading strategy and were placed with the intention to execute. In truth and in fact, however, Zhao admitted as part of his plea that when providing this response to the CME, he knew that he had placed certain large orders identified in each example with the intent, at the time they were placed, to cancel them before execution (i.e., the large orders were Spoof Orders). Zhao admitted that his statement to the CME that he placed these large orders with the intention that they be filled was false and misleading, and that he made this false statement in order to falsify, conceal and cover up his spoofing conduct.
This case is the result of an ongoing investigation by the FBI’s Chicago Field Office. The International Crime Cooperation Central Authority of the Australian Government Attorney-General’s Department, the Australian Federal Police and the Criminal Division’s Office of International Affairs provided significant assistance in connection with the arrest and extradition of Zhao. The Commodity Futures Trading Commission’s Division of Enforcement and the Australian Securities and Investments Commission also provided substantial assistance in this case.
Trial Attorney Matthew F. Sullivan and Assistant Chief Justin D. Weitz of the Criminal Division’s Fraud Section are prosecuting the case.
Individuals who believe that they may be a victim in these cases should visit the Fraud Section’s Victim Witness website for more information.