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Sydney trader pleads guilty to manipulating Chicago futures market
An Australian commodities trader has pleaded guilty to market manipulation in Chicago, after being caught out as part of what the US Justice Department says is the largest legal action of its kind in history.
Jim Zhao, who was arrested in Australia in January and extradited to the US, on Wednesday admitted to manipulating futures contracts through "spoofing", according to reports.
Sydney trader Jim Zhao, 31, has pleaded guilty to "spoofing". Credit: Facebook/Jim Zhao
Spoofing is the act of placing and quickly cancelling orders to trigger a rise or fall in prices, and then capitalising on that price change by simultaneously placing genuine orders to buy or sell.
The 31-year-old's Chicago lawyer, Theodore Poulos, told the court Zhao made US$21,000 ($30,000) from the illegal trades.
Zhao executed the trades on the Chicago Mercantile Exchange from Sydney, while at least seven others were also charged at around the same time.
The investigation spanned four continents and implicated four of the world's biggest banks, and resulted in what the US Justice Department said was the "largest futures-market criminal enforcement action" in its history.
Deutsche Bank, UBS and HSBC have agreed to pay $US46.6 million ($63.3 million) in penalties stemming from the investigation, while Bank of America Merill Lynch was implicated but not sanctioned.
All four banks received reduced penalties for providing significant assistance to investigators.
Zhao's involvement lasted from July 2012 through to March 2016 during which time he would place one or more large orders for futures on one side of the market with the intention to then cancel them, according to an affidavit filed by FBI special agent A. Wesley Nevens.
Misleading the market
"The purpose of these spoof orders was to trick other market participants by injecting materially misleading information into the market that indicated increased supply or demand, but was not genuine because [Zhao] never intended to execute the bids or offers contained in these spoof orders," the affidavit said.
The spoof orders "often induced market participants to buy or to sell... at quantities, at prices, and at times that they would not have otherwise".
He said that Zhao would execute smaller orders on the opposite side of the market to capitalise while his spoof bids were causing prices to change. Only 0.03 per cent of the "spoof" orders were ever bought or sold, and the orders were cancelled on average within 0.67 seconds after the last of Zhao's genuine orders had been filled.
The entire process would only take less than 15 seconds on average. The FBI identified over six hundred occasions when Zhao carried out the pattern of suspect trading activity.
Zhao's lawyer said he and prosecutors would recommend a one-year prison sentence. Zhao is due to be sentenced July 19, and will be allowed to return to Australia in the meantime.
With time served in Australia awaiting extradition, that means Zhao could only serve a few more months behind bars.
- with AP and Rachel Olding