Citigroup became the first-ever bank to get hit with civil "spoofing charges," when its Global Markets unit agreed to pay $425 million to settle CFTC charges that it entered U.S. Treasury futures market orders with the intent of canceling them.

The CFTC first won new powers to go after manipulative "spoofing" in 2010 under Dodd-Frank. The term refers to efforts by traders to create a false appearance of market interest in a commodity or other financial instrument by placing orders and then immediately canceling them.

In the CFTC's civil case, ….   5 traders at Citigroup Global Markets, a Futures Commission Merchant (FCM) engaged in spoofing more than 2,500 times in various Treasury futures between 7/16/11 and 12/31/12. The bank was also charged with failing to supervise.

According to regulators, the traders’ spoofing strategy involved placing bids or offers of 1,000 lots or more with the intent to cancel those orders before execution. The spoofing orders were placed in the U.S. Treasury futures markets after another smaller bid or offer was placed on the opposite side of the same or a correlated futures or cash market. The traders placed their spoofing orders to create or exacerbate an imbalance in the order book and cancelled their spoofing orders after either the smaller resting orders had been filled or the traders believed that the spoofing orders were at too great a risk of being executed.

In addition to executing the spoofing strategy individually, on at least one occasion, some of Citigroup’s traders coordinated with each other to implement the spoofing strategy, by placing one or more spoofing orders after another trader had placed one or more smaller resting orders in the same or a correlated futures or cash market.

Citigroup was credited with cooperating during the investigation and self-reported some of the spoofing orders after CME Group inquired about a number of suspicious orders.

[Click here for the CFTC Press Release.]