CFTC Market Surveillance Program
CFTC Market Surveillance Program - CFTC
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CFTC Market Surveillance Program

  • Trade Practice Surveillance Program

    Trade practice surveillance may be defined as direct monitoring of exchange transactional data, including orders and executed trades. Trade practice violations include, among other things, wash trading, prearranged trading, accommodation trading, customer fraud, fictitious sales, price distortion and manipulation, trading ahead, trading against, and front running.

    The Commission’s trade practice surveillance program is intended to preserve the economic functions of U.S. futures and option markets under its jurisdiction by monitoring trading activity to prevent fraud against individuals and the broader markets and thereby ensure customer protection and market integrity. In addition, the Commission’s trade practice surveillance program plays a critical role in inter-exchange surveillance, since only the Commission can consolidate data from multiple exchanges and foreign regulators to create a seamless, fully-surveilled marketplace.

    Since its inception, the Commission has used independent, direct surveillance of exchange-based trading as a key element of its mandate to ensure the integrity of the futures markets. Trade practice surveillance is not conducted exclusively at the CFTC; the exchanges have self regulatory responsibilities to police their markets to detect and prevent trading abuses.

    In addition to its trade practice surveillance program, the CFTC has a market surveillance program, whose primary mission is to identify situations that could pose a threat of manipulation and to initiate appropriate preventive actions.

    Detection of Trading Abuses

    Trade practice surveillance usually refers to the individual and aggregate analysis of transactional and audit trail data with respect to both orders and executed trades. It is used to detect fraud upon customers (including trading ahead, front-running, misallocation of fills, bucketing, and churning) and fraud upon the market (including wash trading, bumping or marking the close, and accommodation trading).

    To detect these types of abuses, Commission staff routinely reviews individual trading activity at each domestic exchange. Staff looks for patterns of activity that may indicate possible violations of the Act by one or more market participants. When such patterns are found, staff expands its investigation. Staff examines a longer time period, looks for related violations or other parties who may be involved, obtains supporting documentation, considers the harm to customers or the market, and marshals the evidence. If there is sufficient evidence to indicate a possible violation of the Act, the matter is referred to the appropriate exchange or to the Division of Enforcement (for more significant matters) for continued investigation, disciplinary action, or enforcement action.

    Inter-Exchange and Cross-Border Surveillance

    Inter-exchange and cross border surveillance of competing, related contracts is an increasingly important regulatory function for the Commission. It requires access to multiple streams of proprietary information from competing exchanges, and as such, can only be performed by the Commission or other national regulators. The Commission can and does receive trading data from multiple exchanges and foreign regulators whenever there is a sufficient relationship between competing contracts that trading violations in one could lead to abuses in the other. Staff analyzes such data to detect possible inter-exchange violations, and the Commission occupies a unique space in the regulatory arena that cannot be filled by foreign and domestic exchanges offering related competing products.

    Trade Surveillance System

    The Commission’s overall mission is to ensure market integrity and customer protection in the U.S. futures markets through effective oversight. As part of this mission, the Commission collects trade data from all U.S. futures exchanges and conducts investigations to detect possible trading abuses. Exchange trade data collected include commodity, futures month, price, strike price, quantity, time, executing persons, clearing firms, CTI codes, reference information, etc. The Commission is currently developing a new electronic Trade Surveillance System (TSS) to more efficiently process and analyze the trade data it collects.

    TSS will enhance the Commission’s surveillance of trading activity over the innovative and ever-expanding markets with greater efficiency and flexibility. Trade violation detection software will perform sophisticated pattern recognition and data mining to automate basic trade practice surveillance. Among other things, TSS will provide Commission staff with the necessary tools to conduct inter-exchange and cross border surveillance of related contracts; to detect novel and complex abusive practices in today’s high-speed, high volume global trading environment; and to perform timely and customized analyses of all trading activity as well as complex, value-added surveillance in significant cases.

    TSS also will better support Commission-wide information needs. This will include facilitating Commission cooperation with other federal and international regulators and Commission responsiveness to Congressional data requests and data requests made under the Freedom of Information Act.