Ex-Deutsche Bank traders say DOJ ignores context of trading on anonymous electronic exchange
Less than two weeks after the Department of Justice (DOJ) opposed the motion for acquittal filed by former Deutsche Bank traders James Vorley and Cedric Chanu, the traders have made it clear that they disagree with the DOJ and will stand by their push for acquittal. This becomes clear from the latest document filings with the Illinois Northern District Court.
Vorley and Chanu argue that, in its opposition, the US Government ignores a large part of the context of trading on an anonymous electronic exchange.
Let’s recall that the Government accuses the duo of misrepresenting an “intent to trade” out of an anonymous bid or offer on the CME’s exchanges. The government argues that Vorley’s and Chanu’s “orders falsely implied that they intended to trade when, in fact, as only they knew, their orders were intended to be canceled after they moved the market and benefitted orders on the opposite side of the market that they did want to execute. Put bluntly, the DOJ accuses the former Deutsche Bank traders of spoofing.
According to the latest Court filings, Vorley and Chanu disagree with the Government’s claims.
Vorley and Chanu state that:
The government’s opposition also fails to address most of the context of trading on an anonymous electronic exchange, which allows for all kinds of conduct that could be characterized as “deceptive.”
To the extent that the order communicates anything about the trader’s subjective intent, it could only be an intent to trade “under the terms and conditions of the order.” The traders note that, in this case, those terms and conditions included the ability to place orders on both sides of the market anonymously, to cancel any order in a matter of milliseconds, and even to misrepresent the actual supply or demand by using iceberg orders or trading in a way that was invisible to other traders. Hence, no reasonable market participant could believe that an order communicated an “intent to trade,” in the sense of the absence of an existing “intent to cancel.”
Vorley and Chanu argue that, every reasonable market participant knew that a trader placing an order on the exchange could cancel that order a millisecond later for any reason or no reason at all.
Vorley and Chanu stress that this was an anonymous exchange, where traders were permitted to trade on both sides of the market, and cancellations occurred all the time within milliseconds. The exchange also allowed traders to misrepresent actual supply and demand by using icebergs or to trade invisibly by placing immediate-or-cancel orders.
In this type of trading traders may have tried to guess at the subjective intent of other traders. However, the orders themselves did not communicate anything beyond an intention to trade at the prices and quantities specified if they were executed before they were cancelled.
The entire context of trading on the CME’s anonymous exchange that precludes a finding that an order communicates a trader’s subjective “intent to trade,” Vorley and Chanu say.
The defendants add that “an exchange can decide to prohibit certain kinds of trading as “disruptive” or even “manipulative,” but that would not transform every rule violation into a fraud on other traders based on an implied misrepresentation that the trading comported with the rules’.
All traders knew that orders could be cancelled at any time and that they could not possibly know anything about another trader’s subjective intent, Vorley and Chanu conclude.
In September 2020, Vorley and Chanu were convicted of three counts and seven counts, respectively, of wire fraud affecting a financial institution. The traders allegedly engaged in a scheme to defraud other traders on the Commodity Exchange Inc., which was run by the CME Group. The defendants defrauded other traders by placing fraudulent orders that they did not intend to execute in order to create the appearance of false supply and demand and to induce other traders to trade at prices, quantities, and times that they otherwise would not have traded.