The enforcement Chief of the Commodities Futures Trading Commission which oversees the $50 trillion futures market, Aitan Gielman, says flatly that there is a massive amount of fraud in the marketplace including front-running, insider trading and Ponzi schemes that the oversight agency is not pursuing because Congress has starved the agency of resources. As a result, investors and taxpayers are being cheated because the markets are being manipulated. All the while the wrongdoers are making hundreds of millions off the back of the average person. Front-running, also known as forward trading happens when a trader takes advantage of market movements and trades on his or his company’s assets based on advanced knowledge of a pending order. For example, this is the case when a trader learns of a large client order and uses his own or his company’s account before the client’s order is executed. Front running is happening in stocks, index funds, foreign exchange markets, securities, commodities and front runners are now using high speed computer programs to trade ahead of the clients. Where the front runner uses information not available to the public, the practice is clearly illegal. Little is being done to stop it.
The infrequent cases result in large payments but no significant incarceration. In January 2018, SBC Holdings paid $101 million to settle criminal charges that the bank engaged in “front-running” on foreign exchange to defraud two clients in 2010-2011, according to court documents.The bank will pay a $63 million criminal penalty and $38 million in disgorgement and restitution to settle the charges under a deferred prosecution agreement in which HSBC accepts responsibility for its employees’ actions, the documents said. Under the agreement, HSBC will forgo any criminal charges in the case as long as the bank adheres to the terms of the settlement.HSBC had been charged in U.S. District Court in New York with two counts of wire fraud in connection with the alleged scheme. HSBC FX traders misused confidential information from clients to execute British pound FX transactions on two occasions in 2010 and 2011, with the bank taking in a combined $46 million in profits on the two transactions to the traders’ and HSBC’s benefit, according to court documents.
The settlement payment is the latest by HSBC over foreign-exchange trading issues. In October, the bank was fined $175 million by the Federal Reserve Board for failing to detect its FX traders’ misuse of client information. In November 2014, HSBC paid $275 million to the Commodity Futures Trading Commission and $341 million to the U.K. Financial Conduct Authority to settle charges that it manipulated FX benchmark rates.