Merrill Lynch Commodities: Precious-Metals Spoofing and Desk Controls

The Merrill Lynch Commodities metals spoofing settlement required approximately $25 million to resolve Commodity Futures Trading Commission allegations over orders intended to move prices and disappear before execution. The Commission alleged that traders used large orders on one side of the market to help genuine orders fill on the other. For someone who knows the desk, the revealing connection in that account is between the trade the traders wanted and the orders they never intended to honor.

Can the Commodity Market Be Manipulated?

Commodity markets can be manipulated by creating a false picture of buying or selling interest. In its June 25, 2019 settlement order, the Commission alleged that Merrill Lynch Commodities traders intended to manipulate precious-metals futures prices and succeeded in causing artificial prices. The alleged conduct covered at least 2008 through 2014.

Merrill Lynch Commodities, a Bank of America subsidiary, traded commodities. The order described the company as headquartered in Houston, with operations in New York and precious-metals traders working at desks in the United States, the United Kingdom and elsewhere. Those traders entered futures transactions on the company’s behalf, as well as related options transactions.

The futures business involved gold, silver, platinum and palladium. The order identifies the market as COMEX, a futures exchange owned and operated by CME Group. What happened on the screen mattered because other participants could respond to the buying and selling interest displayed there.

The Commission described a recurring sequence in its allegations. A trader manually entered a relatively small bid or offer that the trader wanted to execute. Before it filled, the trader placed a larger order, or several orders, on the opposite side of the same market with the intent to cancel them before execution. Generally, the genuine order filled in whole or in part, and the trader canceled the opposing orders before they filled.

The Commission alleged that traders designed the apparent demand or supply to move the price toward their desired execution. That is the trick it described: other participants see interest the trader has no intention of honoring, while the trader gets a real fill. We see the unfairness in that exchange. One side acts on the market it can see. The other has helped manufacture the view.

The Desk’s Own Words on Moving the Market

The desk’s own messages connected spoofing with moving prices. In a November 16, 2010 chat reproduced in the Commission’s order, a trader described how algorithms reacted:

That sentence gives the order sequence a purpose. The trader was discussing how to make the market move, and the Commission placed the conversation alongside its allegations that the traders created false buying or selling interest to obtain their desired prices.

Another exchange, in February 2011, made the coordination visible. One trader told a trader at an affiliated business, “that was me pushing it” and “dont do it yourself I will help you.” The Commission alleged that, in line with that conversation, the first trader engaged in spoofing in silver futures. The messages connected activity on the screen with someone offering to move the market for a colleague.

For a trader on the other side, the consequences could extend beyond a bad fill. The 2016 Futures & Derivatives Law Report paper The Exercise of Anti-Spoofing Authority in U.S. Futures Markets: Policy and Compliance Consequences explains that spoofing can lure participants into losing trades or cause them to avoid profitable trades to escape suspected spoofers. A market participant may change how they trade because the displayed interest has stopped being trustworthy.

What Evidence Is Required to Prove Fraud?

For this spoofing pattern, the evidence connects the intent when an order was entered with the order’s behavior, the opposite-side fill and the desk’s communications. The Merrill order puts those pieces together: manually entered orders, the genuine trade, intended cancellations and messages about affecting prices. The useful account follows the whole sequence, including what happened before the cancellation.

The Futures & Derivatives Law Report paper explains why surveillance needs the life of an order. Its analysis describes processing order submissions, modifications, cancellations and executions, with market expertise needed to interpret the data. That is why an execution developer’s understanding of how an order behaved can add something a completed-trade report leaves out.

The industry’s record systems preserve more than trades that went through. The recordkeeping rules cover filled, unfilled and canceled orders, along with specified messages and conversations leading to a trade. For a whistleblower who knows those systems, the order history and the desk conversation can describe different parts of the same decision.

The paper also draws a useful distinction between seeing suspicious trading and identifying the firm behind it. Public order data can reveal suspicious activity, but futures trading is anonymous and the exchange holds the identifying information. An insider who knows the desk, account or instruction can therefore contribute context that another participant watching the market does not have.

We work with that connection between the screen and the business. A repeated pattern of large orders disappearing after opposite-side fills gives us a trading story to examine. Knowledge of who directed the sequence and what they wanted it to accomplish gives the story its purpose. The Merrill chats show why both belong in the same account.

What Is the Penalty for Market Manipulation?

In the Merrill Lynch Commodities settlement, the Commission ordered a civil monetary penalty of $11,500,000. The order also required $11,100,000 in disgorgement and $2,364,585 in restitution. The penalty barely exceeded what the company was ordered to give back in disgorgement.

The Commission credited the company’s substantial cooperation with a substantially reduced civil penalty. Merrill supplied detailed trading-data analysis and relevant documents during the investigation. We see the contrast: the order describes repeated deception on the desk, then rewards the company for helping investigators understand it.

Desk Controls Had to Reach the Trading

Merrill Lynch Commodities told the Commission it had strengthened controls across its precious-metals business, including spot, options and futures trading and supervision of those desks. The order recorded measures begun before the investigation and continued afterward. It also required the company to maintain and update its compliance program to detect and deter violations.

The company reported improvements to transaction monitoring, communications surveillance and escalation of potential misconduct. Those changes matter to someone who reviewed alerts or worked on escalation. A system can capture an order sequence, a chat can explain the objective, and a review response can show what the business did with the concern. We want to understand how those pieces met inside the desk, including who could connect the trading to the message.

The related JPMorgan case shows why the response deserves its own attention. The Commission’s September 2020 settlement addressed precious-metals and Treasury-futures spoofing and supervision failures despite alerts, inquiries and internal allegations. Merrill’s order describes the alleged trading sequence and the company’s reported control improvements. The JPMorgan findings show how warnings themselves can become part of a supervision case.

What an Insider Would Recognize

A metals trader may know what a colleague wanted to fill and why the larger orders appeared. An execution developer may understand the order messages and the behavior of the trading system. A surveillance reviewer may know what the sequence looked like in an alert and what happened after someone raised it. Each perspective can connect the market activity to a decision inside the business.

Your knowledge can be useful even when your work gave you only part of that picture. We bring the trading account and the business decisions together with you, then identify the expertise the case needs. The point is to make clear what your knowledge explains about the orders, their purpose and the response inside the company.

The CFTC whistleblower reward range is 10% to 30% of collected monetary sanctions, shared among qualifying whistleblowers in an action. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. These are different programs, and we work with you on the route that fits the conduct you know.

The Decisions Behind the Order Book

If your work explains the purpose of the orders or the decisions behind a surveillance alert, talk with our whistleblower experts about the trading you know. We develop the case around that knowledge and bring in CFTC whistleblower lawyers with experience in futures-market manipulation. From the first conversation through the case, we stay at your side and keep what happened inside the business at the center of the work.