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Spoofing and Scapegoating

See the U.S. criminal complaint against Mr. Sarao¬†sworn and signed in February 2015, alleging that he had spoofed market participants for many years (from June 2009 to April 2014) by submitting futures contract offers that he had no intention of fulfilling. A respected professor has opined that this practice of submitting “bogus orders” is common in markets, and Mr. Sarao is a scapegoat. In the case of Mr. Sarao it seems evident that the exchange (namely, the CME) was specifically aware of related suspicious conduct in March 2009, and it sent him a written notice in May 2010, reminding him that orders were to be submitted in good faith (see para. 26 in the complaint). So what took so long to arrest this scheme?

The following observations seem arguably supported (but do not answer directly the question):

  1. Generally, conduct that appears to be false and manipulative in fact may be commonplace in markets. For example, prices of investment products gyrate routinely, often beyond the rhyme and reason of actual information in the public domain.
  2. Generally, conduct that is successfully prosecuted under various fraud theories (that is, resulting in guilty pleas or verdicts) is a much smaller subset of the conduct in 1. above. Fraud is a legal conclusion applied to packets of evidence (and not a statement of fact).
  3. Generally, prosecution of each and every discovered and discoverable criminal wrongdoing is bad public policy. Dedication of the resources required for this potential outcome would be accompanied by increased taxation by the government, increased fees imposed by the government, increased public sector borrowing, increased outsourcing to specialized private sector entities, etc. In brief, prosecutorial discretion is sound policy, especially in light of the opportunity costs of comprehensive law enforcement (that is, support of other worthwhile governmental activities such as education would likely decline).
  4. Generally, Mr. Sarao’s conduct may not in fact be materially different from innumerable other traders. For example, the respected professor referred to the case of high frequency or algorithmic traders that prepare false orders. Undoubtedly, people get away with murder sometimes, and traders sometimes make a killing with less than legal and ethical means and methods.
  5. Generally, innumerable individuals claim to have been scapegoated by the exercise of prosecutorial discretion and selective law enforcement. For example, just about everyone caught speeding on the highway has likely pointed out the routine and readily observable practices of some other dudes in exceeding the posted speed limit. For better and worse, general and specific deterrence are the terms conventionally used in crime and punishment circles (rather than scapegoating).
  6. Specifically, Mr. Sarao might not have been scapegoated. Fair-minded individuals should await resolution of the matter, however concluding that he has been to date treated unfairly by law enforcement and the self-regulatory organization seems a stretch for an individual whose early response to the CME reminder of trading in good faith c. May 2010 was an invitation to the CME to ‘kiss his ass’ (see para. 26 of the complaint). This invitation may be appropriate in limited circumstances but seems at best an unwise response to the exchange endeavoring to more or less reduce the risk of trading in bad faith.


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