By Bradley Hope 

In a rare confrontation, the two biggest futures exchanges are clashing with the industry regulator over its pursuit of a Chicago trading firm for market manipulation.

Last week, CME Group Inc. in Chicago and Intercontinental Exchange Inc. in Atlanta, together with representatives of the futures trading industry, jointly filed a friend-of-the-court brief opposing the Commodity Futures Trading Commission's definition of "manipulation" being used in a 2013 case against DRW Investments LLC and its founder, Don Wilson Jr.

The exchanges argue that the CFTC is trying to establish a lower burden of proof for market manipulation in the case, which could open up legal trading to potential enforcement actions. Exchanges typically don't oppose the CFTC in enforcement cases.

On Tuesday, lawyers for the CFTC filed a motion opposing the inclusion of the brief in the case because it was filed late and by entities that weren't friends of the court, but "friends of the litigant."

The argument goes to the heart of whether firms have the right to trade if they know their buying or selling will affect the price of a futures contract.

It also raises the stakes in an increasingly public showdown between the CFTC and Mr. Wilson, a usually low-profile but influential trader who is fighting the regulator's charges against him and his firm.

DRW is one of the biggest proprietary trading firms in Chicago. The 700-person firm uses quantitative analysis to trade on more than three dozen exchanges around the world. About a quarter of its business involves high-frequency trading that relies on high-speed telecommunications networks and automated computer systems.

The allegations of manipulation center on DRW's trading in an obscure corner of the futures market over 118 days in 2010 and 2011. The CFTC says DRW sought to manipulate the price of interest-rate swaps traded on Nasdaq Inc.'s exchange to help make a profit on an earlier $350 million bet on the direction interest rates would move. Interest-rate swaps let firms protect or bet against future swings in rates.

The trades helped Mr. Wilson earn $20 million in illegal profits, according to the CFTC.

"Traders cannot engage in manipulative acts to affect the price of futures contracts to achieve their desired profits, regardless of the so-called motive," the CFTC's acting head of enforcement, Gretchen Lowe, said in a statement at the time.

DRW's lawyers have argued the trades weren't manipulative because they were adequately exposed for other market participants to trade against. They have also pointed to a Sept. 2011 review by the National Futures Association of DRW's trading over the same period, which concluded that the manner of the trading reduced the likelihood it manipulated prices. The NFA is a self-regulatory agency that polices the futures industry. It declined to comment.

In the friend-of-the-court brief submitted Jan. 12 the exchanges and futures trading representatives argued that the CFTC's case relied on a new, broader definition of manipulation that would "upset settled trading expectations and practices, and risk compromising the many public interests that derivatives markets serve--including price discovery, liquidity and hedging."

The brief was submitted by a lawyer at Skadden, Arps, Slate, Meagher & Flom LLP, a firm where David Meister, a former CFTC head of enforcement at the time of the case against DRW, is employed. A spokeswoman for the firm said Mr. Meister was "walled off from the matter."

The CFTC said in its motion on Tuesday that because Mr. Wilson was a member of the CME and a former board member of the Futures Industry Association, those entities were only attempting to "parrot" the defendant's arguments. All substantial traders on the CME are members.

From the outset of the case, Mr. Wilson has dug in for a fight. When the CFTC informed him in 2013 that it planned to bring charges, he filed a lawsuit to try to stop them. The effort failed.

Last year, he hired former White House Special Counsel Lanny Davis to plead his case with lawmakers in Washington.

Spokeswomen for the CME and ICE declined to comment. A spokesman for the CFTC declined to comment. Mr. Wilson declined to comment.

Write to Bradley Hope at bradley.hope@wsj.com

 

(END) Dow Jones Newswires

January 20, 2016 16:36 ET (21:36 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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