(Bloomberg) — Before he gained notoriety, Igor Oystacher was known as 990.
That was the identification code assigned to the firm where he worked in 2004, when the head trader at Chicago-based Kingstree Trading LLC noticed something hed never seen before in the Standard & Poors 500 futures market. He watched again and again as 990 ran over everyone in what he called an unprecedented display of market manipulation. The head trader alerted an executive at the firm to the practice, according to both men, who asked not to be identified by name for fear of reprisal.
By the end of that year, 990 was being cursed all over Chicago. Angry traders took to Internet message boards to rant. They petitioned the Chicago Mercantile Exchange to stop whomever it was. Word spread that the tag belonged to Gelber Group LLC, a proprietary-trading shop that had hired a Russian whiz kid who dropped out of Northwestern University.
This week, 11 years after that rude introduction,the U.S. Commodity Futures Trading Commission filed a civil complaint against Oystacher and his current firm 3Red Trading LLC for cheating on some of the worlds biggest futures exchanges, the latest attempt to stamp out a form of price manipulation known as spoofing.
The CFTC accused Oystacher and 3Red of creating the appearance of false market depth to benefit their own interests while harming other market participants, according to a statement on the agencys website. The spoofing allegedly occurred on the Chicago Mercantile Exchange, the New York Mercantile Exchange, the Commodity Exchange and the Chicago Board Options Exchange, the CFTC said. The complaint didnt include any of Oystachers activities while at Gelber.
Flash Crash
The action is the third high-profile case brought by U.S. authorities in the past year as they crack down on a type of trading only defined and outlawed in 2010. Navinder Singh Sarao was indicted in August for alleged spoofing that helped spark the May 2010 flash crash, which temporarily wiped out almost $1 trillion from the value of U.S. equities.
The charges are completely without merit, saidGreg OConnor, chief compliance officer of 3Red. The CFTC has oversimplified complex trading and is now trying to classify legitimate trading and risk management as a market infraction. We stand behind the trading at issue as it does not contradict available guidance nor violate the law. Our firm cooperated with the CFTC throughout its four-year review with the belief that a fair evaluation of the facts would convince the commission that no charges should be filed. We now look forward to presenting our case before the court.
Thomas Becker, a spokesman for Oystacher, said the allegations relating to Gelber from 2004 were false. Gelber co- founder Brian Gelber didnt return phone calls or respond to an e-mailed list of questions. Lawyers for Sarao, who lives near London, have said his actions werent a crime in the U.K. and are fighting his extradition to the U.S.
Canceling Orders
Spoofers attempt to profit from moving prices by placing orders they never intend to fill and then canceling them. Theres nothing wrong with canceling orders; whats illegal in the U.S. is placing them with the intention of doing so. With most trading now computerized, the sanctity of the order book — whether the numbers on traders screens in London or Chicago or Tokyo are valid — is of paramount importance. Thats why regulators and prosecutors have zeroed in on spoofing.
The notion of the market is that all activity should represent bona fide supply and demand, said Geoffrey Aronow, a former head of enforcement at the CFTC whos now a partner at Sidley Austin LLP in Washington. If you have activity thats not reflecting true bids and offers, thats going to skew that equilibrium.
Because the legal definition of manipulation is convoluted, the CFTC had scored only one court victory from its creation in 1974 to 2010. Then, as part of the Dodd-Frank Act, it was able to get a broader category of disruptive trading defined as illegal. Spoofing falls into that new category.
Oystacher, 33, has made millions of dollars in a career that began in 2003, when he dropped out of Northwestern and began trading at Gelber. He left the Chicago firm in 2010 to start his own company, 3Red, where he racked up more than $660,000 in spoofing fines from three of the largest futures exchanges in the world, drew the scrutiny of federal prosecutors in Chicago and became ensnared in a legal fight with a business partner. His LinkedIn profile bears the tag clinical observer of human carnival.
Chess Prodigy
Born in Moscow and now a dual U.S. and Russian citizen, Oystacher excelled at chess as a child, according to a person who knows him well. He dated a granddaughter of former Soviet President Mikhail Gorbachev and emigrated to the U.S. in his teens to live with relatives in Michigan, the person said.
While at Northwestern, Oystacher got an internship at Gelber, which started in 1982 as a floor brokerage on the Chicago Board of Trade and became one of the biggest traders of S&P 500 futures. Coming to work every day in the same clothes with a disjointed air about him led traders at the firm to think he wouldnt last a week, the person said. In fact, Oystacher became one of the best traders in Gelbers history.
By 2004, Oystacher was making waves, buying from and selling to himself in an early version of what came to be known as spoofing, according to the two people familiar with the matter. While spoofing hadnt been explicitly outlawed at the time, it was recognized as a form of manipulation.
It didnt take long for people at Kingstree to connect the dots. Because the codes of trading firms were disclosed at the time to counterparties after transactions were completed, the head trader knew he was up against someone from Gelber, the people said. While he couldnt be sure which Gelber trader, he knew Oystacher was the firms specialist in S&P 500 futures, the same derivatives he traded.
Wash Trading
Heres what the Kingstree trader said he observed: 990 would place a large order to sell futures, presumably to entice others to join the selling. He would then turn around with an even bigger buy order to sweep all the contracts for sale, including his own.
Intentionally taking both sides of a trade so theres no change in ownership, a practice known as wash trading, is illegal. Honest traders, having sold in a rising market, would need to buy back contracts at a loss.
The Kingstree trader started videotaping his computer monitors while all this was going on. It got so bad that one day, after he lost $300,000 to 990, his colleagues had to talk him out of going to Gelbers office to beat up Oystacher, he said.
In 2005, Oystacher hired Jimmy Chiu, a friend from Northwestern. Together, they wrote a software program that figured out how to bait a computerized trading strategy at Citadel LLC, according to two people with knowledge of the matter.
Oystacher Payday
Oystacher said he was paid $10 million by Gelber in 2006, his cut of the profits from the Citadel trade and others, according to the person who knows him. A rule of thumb for firms such as Gelber is that they take 25 percent to 50 percent of the profits, meaning Oystacher and Chiu may have made between $20 million and $40 million for the firm that year, the second person said. Zia Ahmed, a Citadel spokesman, declined to comment. Oystachers spokesman said the numbers are false.
Oystacher was riding high. He would fly to Las Vegas with only a computer and no other luggage, and then proceed to buy new clothes and toiletries there, the person who knows him said. He once parked his Mercedes-Benz SL5 — a $150,000 car — at a friends house and left it there for nine months while he was in New York, the person said.
Chiu, who left Gelber in 2007 to join Jump Trading LLC, was fined $155,000 in 2010 by exchange operator CME Group Inc. and suspended from trading for two months for spoofing. He neither admitted nor denied the findings as part of the settlement.
Mr. Chiu strongly denies the allegations at issue, Christian Kemnitz, a lawyer for Chiu, said in response to a list of e-mailed questions about Chius work with Oystacher.
Spoofing Fines
Gelber was fined $750,000 by the CFTC for the actions of an unnamed proprietary trader who spoofed in Nasdaq index futures between August 2009 and February 2010, the agency announced in early 2013. That followed a CME fine of $75,000 against Gelber for spoofing Nasdaq futures during the same period, allegations Gelber neither admitted nor denied.
Oystacher left Gelber in late 2010 and partnered with Edwin Johnson, another trader at the firm, to start 3Red.
The CFTC said in its complaint that Oystacher and 3Red spoofed in futures markets based on copper, natural gas, the S&P 500 equity index and an options volatility index. Oystacher is accused of using a feature of the trading software known as avoid orders that cross, the CFTC said. He would place a large resting order on one side of the market to trick others into thinking prices were about to rise or fall, according to the CFTC. Then, because the avoid orders that cross function was in use, the small order hed place on the other side of the market would cancel the large resting order within 5 milliseconds.
The CFTC investigation started two years after 3Red got off the ground, according to court documents filed in an unrelated civil lawsuit. After the regulator subpoenaed Oystacher, Johnson and 3Red, the company agreed to hand over trading records, according to the documents. Executives were interviewed in 2012 and 2013 by the CFTCs enforcement division. Johnson wasnt named as a defendant in the agencys complaint this week. Anthony Pinelli, a lawyer for Johnson, who has since left the firm, declined to comment.
In addition to the CFTC inquiry, a federal grand jury has heard testimony in Chicago about Oystachers trading practices, a person with knowledge of the matter said last month. Prosecutors are investigating Oystacher for spoofing and will watch how the CFTC case unfolds to see how to focus their efforts, two people familiar with the probe said. Oystachers spokesman declined to comment on that inquiry.
Zen Room
3Red, now located a few blocks from the Chicago Board of Trade and the Federal Reserve in the citys financial district, trades commodities, equities, futures, options and interest-rate products, according to its website. It also offers its workers on-site table tennis and catered meals, a Zen room and Friday cocktails, the website says.
Oystacher reached settlements in the past year with the two largest U.S. futures markets, CME Group and Intercontinental Exchange Inc., which together included payment of $275,000. CME, which looked into trading in futures based on crude oil and metals, barred Oystacher from trading for a month. ICE, which accused him of placing fake orders in an effort to sway futures on the Russell 2000 Index, told him to stop the practice. Oystacher settled without admitting or denying wrongdoing.
While Oystacher was under investigation by the CFTC, Europes largest futures marketin May banned a trader it referred to as Mr. A. for 30 days. Mr. A is Oystacher, according to a person familiar with the matter. Eurex took the step after fining the trader twice last year for spoofing — 90,000 euros ($102,000)in June and 250,000 euros, the maximum, in July.
Mr. A. has persistently and notoriously continued his twice-sanctioned trading strategy, albeit in an altered form, the Eurex sanctions committee wrote in its May 20 decision. Mr. A has appealed the 2014 rulings in Frankfurt administrative court, Eurex said. A fair-minded trader could have been expected to suspend the censured trading strategy at least until a final legal verdict had been reached.
Vassilis Vergotis, head of Eurexs U.S. office in Chicago, declined to comment on the enforcement action. Becker, Oystachers spokesman, also declined to comment.
Significant Hurdles
Still, establishing intent may require sifting through millions of orders or finding incriminating e-mails as prosecutors say they have done in the Sarao case.
The history of CFTC litigation of manipulation claims under the pre-Dodd-Frank provisions demonstrates that proving intent can be very difficult for the government in trading cases, said Aronow, the former CFTC enforcement chief. While the spoofing provisions have yet to be tested through litigation, that history suggests that the government may face significant hurdles to success in litigated proceedings.
