By Bradley Hope
CHICAGO--One June morning in 2012, a college dropout whom
securities traders call "The Russian" logged on to his computer and
began trading Brent-crude futures on a London exchange from his
skyscraper office here.
Over six hours, Igor Oystacher's computer sent roughly 23,000
commands, including thousands of buy and sell orders, according to
correspondence from the exchange to his clearing firm reviewed by
The Wall Street Journal. But he canceled many of those orders
milliseconds after placing them, the documents show, in what the
exchange alleges was part of a trading practice designed to trick
other investors into buying and selling at artificially high or low
prices.
Traders call the illegal bluffing tactic "spoofing," and they
say it has long been used to manipulate prices of anything from
stocks to bonds to futures. Exchanges and regulators have only
recently begun clamping down.
The 33-year-old Mr. Oystacher referred inquiries to a spokesman
for his firm, 3Red Group LLC, who declined to comment for this
story. In his clearing firm's correspondence with the exchange, Mr.
Oystacher--co-founder of Chicago-based 3Red and well known in the
clubby world of Chicago trading--is quoted as saying his trading is
based on "analytics, statistical modeling and relative value
theories."
Mr. Oystacher's trading activities on that day and others have
been the focus of investigations by the Commodity Futures Trading
Commission, or CFTC, and several exchanges into whether he broke
securities laws or committed fraud, according to court documents,
exchange correspondence and interviews with current and former
associates. One exchange, CME Group Inc., in November banned him
from trading on that exchange for a month after alleging he engaged
in spoofing behavior; he didn't admit or deny any rule violations
in the case.
The Federal Bureau of Investigation and U.S. Attorney's Office
in Chicago have made inquiries into the trading of 3Red, according
to a person familiar with the inquiries. The FBI and U.S. Attorney
decline to comment.
The 2010 Dodd-Frank financial-overhaul law outlawed spoofing,
but the tactic is still being used to manipulate markets, traders
say. "Spoofing is extremely toxic for the markets," says Benjamin
Blander, a managing member of Radix Trading LLC in Chicago.
"Anything that distorts the accuracy of prices is stealing money
away from the correct allocation of resources."
CME, the world's largest futures exchange, put out rule
clarifications in August 2014 intended to end spoofing. The
second-largest, Intercontinental Exchange Inc., or ICE, followed
suit last month.
The CFTC in November said CME should work more on identifying
spoofing and said it took too long to bring enforcement actions.
CME says it had already taken steps to address issues the CFTC
raised, declining to comment further for this story. The CFTC and
ICE decline to comment for this story.
The first criminal charges against an alleged spoofer were
brought in October 2014 in Chicago. The Securities and Exchange
Commission and CFTC have brought several civil spoofing cases since
2012.
Exchanges are wary of rushing investigations into market
manipulation because they are among the most serious allegations
they can make and are difficult to prove, says Craig Pirrong, a
University of Houston finance professor. "They have to go through a
huge amount of data and try to infer a trader's intent to
manipulate the market."
Trader vs. trader
Spoofing is rapid-fire feinting. A spoofer might dupe other
traders into thinking oil prices are falling, say, by offering to
sell futures contracts at $45.03 a barrel when the market price is
$45.05. After other sellers join in with offers at that lower
price, the spoofer quickly pivots, canceling his sell order and
instead buying at the $45.03 price he set with the fake bid.
The spoofer, who has now bought at two cents under the true
market price, can later sell at a higher price--perhaps by spoofing
again, pretending to place a buy order at $45.04 but selling
instead after tricking rivals to follow. Repeated many times,
spoofing can produce big profits.
Spoofing can be hard to define. There are many legitimate
reasons to cancel orders. A trader might cancel after the market
heads in an unexpected direction or when a news flash suggests a
different trade is in order. Market-making firms continuously
adjust and cancel orders as they monitor supply and demand for a
particular security.
And some traders say it can be difficult to distinguish between
illegal market manipulation and savvy tactics to conceal the size
of an intended trade--a technique used by traders since financial
markets' earliest days.
"There are stories going way back about the guys in the Chicago
trading pits trying ways to disguise their trading or show their
cards in a certain light," says Matt Simon, an analyst at the
market-research firm Tabb Group. "It raises a question now about
whether someone is engaging in legitimate market activity or clear
market manipulation."
The full extent of spoofing isn't known, but traders say it is
evident in how prices move every day in a range of stock, bond and
futures markets. Many financial firms have developed software to
detect spoofing so their traders don't get duped.
To look for spoofing, authorities typically use statistical
analysis to determine if a trader's strategy relies on spoofing and
examine emails and other communication for signs of intent to
spoof.
Some recent enforcement focus has been on alleged spoofing by
high-frequency traders, who rely on superfast computers and trading
algorithms to rapidly enter orders.
In the Chicago criminal case that is pending, the U.S. Attorney
last year charged Michael Coscia, a New Jersey high-frequency
trader, in U.S. District Court with six counts of commodities fraud
and six counts of spoofing in 2011. Prosecutors accused him of
illegally earning $1.6 million from spoofing in the U.S. and
Europe. He denied the charges and filed a motion to dismiss them,
arguing that anti-spoofing laws are vague. The U.S. Attorney and a
lawyer for Mr. Coscia declined to comment for this article.
Mr. Coscia separately paid $2.8 million and agreed to a one-year
trading ban to settle CFTC allegations in 2013 of spoofing,
according to CFTC documents. He didn't admit or deny the
charges.
While Mr. Oystacher's company employs high-frequency traders, he
primarily entered orders manually on his keyboard, documents show.
A review of court documents and exchange correspondence and
interviews with more than a dozen current and former associates of
Mr. Oystacher's provide a look at his trading style and show how
complicated investigations into spoofing can be.
Mr. Oystacher moved to the U.S. from Moscow, according to his
Facebook page and people who know him. He entered Northwestern
University in Evanston, Ill., in 1999 and dropped out after three
quarters, a Northwestern spokesman says.
Soon after, he started an internship at Gelber Group LLC, a
prominent Chicago trading firm that cultivated a laid-back
atmosphere where traders often dressed in T-shirts and flip-flops,
say people who knew him at the time. Brian Gelber, the firm's
founder, declines to comment.
Mr. Oystacher stood out for his quick grasp of market
psychology. "He was successful within a year of starting," a former
Gelber trader says. "He was putting up numbers it takes people
three or four years to get to when they are starting out."
His aggressive trading, often in stock-index futures, drew
attention in the trading community, where some dubbed him "The
Russian."
"He's been talked about for years," says John Lothian, a former
Chicago futures broker who publishes an exchange-industry
newsletter.
Within Gelber, he earned nicknames like "Snuggles" and "The
Pig," although former colleagues say they aren't sure why. He had
down periods: After the 2010 Flash Crash, when the Dow Jones
Industrial Average fell nearly 1,000 points before recovering, he
told friends he lost significant money on a series of trades.
He left Gelber in 2010. In 2013, the firm agreed to pay a
$750,000 fine to the CFTC over orders in 2009 and 2010 that an
unidentified trader entered and canceled, allegedly to affect the
price of a stock-index future, a CFTC news release says. Gelber
didn't admit or deny the charges in accepting the settlement.
In 2011, Mr. Oystacher and another Gelber trader, Edwin Johnson,
started their own firm in temporary space in the old Chicago Board
of Trade. They named it 3Red Group after the three red chairs they
and another early employee used.
Mr. Oystacher continued to make an outsize mark on futures
markets. On one day in 2012, for instance, he traded more than
80,000 E-Mini S&P 500 futures--a type of contract on the stock
index--with a combined notional value of nearly $6 billion, trading
records show. His trading could sway markets, traders say.
Mr. Oystacher's trades began to draw attention from exchanges
and investigators. The CME determined that on several dates between
December 2010 and July 2011 he entered large bids and offers for
silver, gold, copper and crude futures he didn't intend to trade,
according to a public CME disciplinary notice. He quickly canceled
those orders, placing others on the opposite side of the market,
the notice says.
Fined and banned
In November 2014, the CME fined him $150,000 and banned him from
trading on the exchange during December 2014. Mr. Oystacher didn't
admit or deny any rule violations in agreeing to the fine and
trading ban, the CME notice says.
A separate investigation into his trading in Brent-crude futures
on ICE's European futures exchange on June 19 and 20,
2012--including the 23,000 commands--gives a glimpse into his
trading.
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
Several days later, a market-oversight analyst from the exchange
wrote to Mr. Oystacher's clearing firm, Advantage Futures LLC,
asking for all documents and communications related to his trades
and a "full explanation of the rationale behind the trade
activity."
ICE provided an Excel spreadsheet showing a detailed history of
instances where Mr. Oystacher entered and quickly canceled a bid or
offer while simultaneously placing an opposite order. On June 19,
Mr. Oystacher completed 430 such reversals--each could take a
number of commands--and 167 the next day.
In a letter to ICE Europe, Advantage quoted Mr. Oystacher as
saying that "we are clicking in response to what we are seeing,"
adding: "If we click quicker than most, it is a skill."
ICE said in a subsequent decision that it didn't accept the
rationale, calling Mr. Oystacher's trades "manipulative behavior"
and ordering him to cease "disorderly trading" on the exchange.
Advantage declines to comment.
Similar investigations into his trading were opened in 2012 and
2013 by regulators from exchanges such as CBOE Holdings Inc. and
what was formerly NYSE Euronext, according to court documents and
correspondence from the exchanges viewed by the Journal. Those
exchanges decline to comment. It isn't clear whether their
investigations have concluded.
A falling-out between 3Red's co-founders led to the ouster of
one of them, Mr. Johnson, in August 2013, according to court
documents and people familiar with the dispute. Last year, he sued
the law firm of Gardiner, Koch, Weisberg and Wrona in Cook County,
Ill., circuit court for allegedly helping Mr. Oystacher push him
out improperly, among other allegations.
According to the lawsuit, the CFTC began investigating the
trading of Mr. Oystacher and 3Red in 2011. Among the exhibits is a
2013 letter from a senior CFTC trial attorney, Jon Kramer,
including a subpoena for 3Red. Mr. Kramer declines to comment. The
CFTC investigation is active, say people familiar with 3Red.
Mr. Johnson's suit said he became "especially concerned about
spoofing" by Mr. Oystacher in June 2013 after numerous regulatory
inquiries. The law firm in a statement denies its attorneys acted
improperly, saying: "We believe that Johnson's suit is without
merit."
In a motion to dismiss the case, Gardiner, Koch, Weisberg and
Wrona said 3Red terminated Mr. Johnson for "theft, fraud, breach of
fiduciary duty, embezzlement" and that his suit was attempting to
"extort funds" from 3Red. Mr. Johnson, in response, denied those
claims. His lawyers decline to comment.
The judge in November granted the motion to dismiss, without
giving an explanation, and gave permission for Mr. Johnson to file
an amended complaint.
The suit included a copy of a settlement Mr. Johnson entered
with Mr. Oystacher soon after his departure, which granted Mr.
Johnson an initial $200,000 and another $250,000 to be paid out
monthly until August 2015. One stipulation: If regulators fined Mr.
Oystacher or 3Red $1 million or more, or if Mr. Oystacher was
banned from trading for five months or longer, payments would
stop.
Amid the scrutiny, Mr. Oystacher has slowed trading, says
someone who speaks with him regularly. "He knows he has a target on
his back."
Michael Rothfeld contributed to this article.
Write to Bradley Hope at bradley.hope@wsj.com
Access Investor Kit for CBOE Holdings, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US12503M1080
Access Investor Kit for CME Group, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US12572Q1058
Subscribe to WSJ: http://online.wsj.com?mod=djnwires