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Bank of Nova Scotia Fine - $127.4M - Spoofing – Jan 2020

Written by SteelEye | Jan 31, 2020 9:00:00 AM

Quick facts

  • Bank of Nova Scotia Fine Amount: $127.4m

  • Date: January 2020

  • Violation Period: January 2008 to July 2016

  • Primary Violation: Spoofing

Bank of Nova Scotia Fine Overview

The Bank of Nova Scotia (Scotiabank) was charged by multiple regulatory bodies, including the SEC, CFTC, and DOJ, for engaging in manipulative and deceptive conduct in precious metals futures markets.

The enforcement action involved four traders across desks in New York, London, and Hong Kong who engaged in thousands of instances of spoofing, primarily in gold and silver futures contracts traded on COMEX. Their manipulative trading typically involved placing small genuine orders followed by larger orders on the opposite side of the market that they intended to cancel. The case also highlighted significant compliance failures, as BNS compliance officers had direct knowledge of potentially manipulative trading but failed to take appropriate action.

Details of the Bank of Nova Scotia Fine

The core trading strategy typically followed a three-step pattern:

  • Step 1: Place a small "genuine" order that they actually intended to execute
  • Step 2: Place larger orders on the opposite side of the market ("Spoof Orders") with no intention to execute
  • Step 3: Cancel the Spoof Orders within seconds after the genuine order was filled

 

Single Large Order Technique
  • Example from December 31, 2015:
    • 11:39:10.679: Placed genuine order to sell 5 gold futures at $1,060.40
    • 82.987 seconds later: Placed spoof order to buy 245 contracts at $1,059.90
    • After 1 millisecond: Market moved higher, genuine sell order executed
    • After 1.123 seconds: Cancelled entire spoof order
Lower Visibility Technique
  • Manipulative Orders outside the top visible price levels
  • Example from May 25, 2016:
    • 11:16:43.047: Placed genuine order to buy 3 gold futures at $1,222.50
    • 10.208 seconds later: Placed spoof order to sell 145 contracts at $1,223.20
    • Orders were deliberately placed in bottom half of order book
    • After 72 milliseconds: Market moved lower, genuine buy order filled
    • After 1.268 seconds: Cancelled entire spoof order
Extended Duration Technique
  • Used longer-lasting spoof orders
  • Example from May 25, 2016:
    • 11:26:42.919: Placed genuine order to buy 10 gold futures at $1,221.70
    • 6.249 seconds later: Placed spoof order to sell 145 contracts at $1,222.20
    • Kept spoof order active for approximately 24.775 seconds
    • Used falling prices to place additional genuine buy orders at lower prices
Layered Order Technique
  • Used particularly by one trader in Hong Kong
  • Placed multiple small (one-contract) orders in groups
  • Typically placed opposite to "iceberg" orders they wanted to execute
  • Example from August 1, 2013:
    • 1:20:21.133: Placed two iceberg orders to buy 10 gold futures at $1,320.00
    • 3.976 seconds later: Started placing series of 57 one-contract sell orders at $1,320.40
    • Cancelled all spoof orders after genuine orders executed

Markets Affected

  • Primary Focus: Gold and silver futures contracts
  • Secondary: Limited instances involving platinum and palladium futures
  • Trading Venues: All activity conducted on COMEX (Commodity Exchange, Inc.)
 

Bank of Nova Scotia Fines and Penalties

The total fine of $127.4 million was broken down as follows: 

  • $35 million specifically for spoofing activities.

  • $17 million for making false and misleading statements during the investigation. 

  • $42 million for spoofing and attempted manipulation.

  • $6.62 million in restitution.

  • $11.83 million in disgorgement.



Select Quotes

  • "Entities seeking to cooperate with the CFTC, like all others that interact with the Commission, must tell the truth. We now have the tools, including through the development of our data-analytics program, to better test and verify the information we receive." - James McDonald, Division of Enforcement Director. 

  • "BNS's compliance and supervision violations highlight the need for all swap dealers to have the right tone at the top—plus appropriate programs and incentives in place—to instill a meaningful culture of compliance among their personnel." - Joshua B. Sterling, Division of Swap Dealer and Intermediary Oversight Director. 

  • "These record-setting penalties reflect not only our commitment to being tough on those who break the rules, but also the tremendous strides the agency has made in data analytics. Our ability to go through the electronic order book and look across markets has enabled the CFTC to not only spot misconduct, but also to uncover false and misleading statements." - Heath P. Tarbert, CFTC Chairman. 


Sources
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