Trader sues Allston Trading for alleged 'spoofing' of CBOT Treasury bond market

Jonathan Bilyk May 30, 2015, 9:00am

A trader at the Chicago Board of Trade has sued Chicago-based Allston Trading, a high frequency trading firm reportedly at the center of a federal investigation, accusing Allston of improperly tampering with the market for U.S. Treasury bonds for years.

On May 26, Mark Mendelson filed a complaint in federal court in Chicago against Allston, alleging the firm has engaged in a scheme to “spoof” the U.S. Treasury futures market at the CBOT.

Mendelson, who is represented in the action by attorneys Rene A. Torrado Jr. and Matthew Jenkins, of the firm of Corboy & Demetrio, of Chicago, and attorney R. Tamara de Silva, of Chicago, has asked the court to award more than $600,000 in damages from Allston for the alleged violations of federal law.

The complaint arises after reports surfaced earlier this spring concerning a reported investigation of Allston’s trading practices by the federal Commodity Futures Trading Commission.

According to those reports, the CFTC was focusing on allegations Allston engaged in a practice known as “spoofing.”

Under such a practice, traders develop programs allowing them to either bid prices up or down, as desired, for futures contracts, with the intention of canceling the bid before the moment came to actually buy. “Spoofing” the market then allows those engaged in the activity to either buy or sell at more advantageous prices, having misled others into believing the market was moving in a direction it otherwise would not.

The practice of spoofing was outlawed under the federal Commodity Exchange Act, and violates CFTC rules regarding market manipulation.

Mendelson in his complaint asserts Allston Trading had engaged in spoofing the CBOT market for 5-year, 10-year and 30-year U.S. Treasuries since at least 2011.

He cited an analysis conducted as part of an arbitration proceeding in which trading firm HTG Capital Partners accused Allston of spoofing. In his complaint, Mendelson said that analysis revealed 6,790 instances of spoofing by Allston from Jan. 1, 2013, to Aug. 29, 2014.

Mendelson’s complaint alleges Allston routinely used the practice to “flip” the market, allowing Allston to buy lower and sell higher than the market would otherwise allow.

For instance, Mendelson’s complaint alleges Allston or people working for the firm on one day, Aug. 27, 2014, “built up the sell side of the order book” by entering orders to sell 30-year Treasury futures. They then allegedly canceled the sell orders and at the same time moved to buy 573 futures contracts at the reduced prices.

Such activities, depending on the direction the spoof carried the market, caused traders holding contrary short or long positions to suffer undue losses, Mendelson said.

Mendelson has requested a jury trial for this matter.

Mendelson also stands as one of a group of traders suing The CME Group, which runs the Chicago Mercantile Exchange, for allegedly giving unfair advantage to high frequency traders by selling them market data.

That case, filed in 2014, remains pending in U.S. District Court.

However, on May 26, U.S. District Judge John Robert Blakey, in that case, denied the plaintiffs leave to file a third amended complaint, saying to do so would allow the plaintiffs to significantly alter their complaint, expanding the class too greatly and cause “undue delay” in the case. The judge said he intended to rule soon on a motion by CME to dismiss that case.

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