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Currency Spoofing Is Said to Be in New York’s Crosshairs

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The New York attorney general is investigating possible manipulation in foreign-exchange trading, according to a person familiar with the matter, aiming more scrutiny at a market already tainted by scandals that have led to billions of dollars in fines.

The investigation centers on brokers who may be placing fake orders, a technique sometimes called spoofing, according to the person. These practices are also referred to as ghosting, because they create the impression of activity that isn’t really there.

New York’s top cop, Eric Schneiderman, has sought to expand his oversight over financial markets, targeting allegedly unfair practices in the U.S. stock market over the past year. In the latest investigation, his office has sent subpoenas for records to interdealer brokers including TFS-ICAP, Tullett Prebon Plc, BGC Partners Inc. and GFI Group Inc., the person said.

TFS-ICAP is a joint venture of ICAP Plc and Cie. Financiere Tradition SA, which ICAP says operates the business. BGC Partners owns GFI. Representatives of the interdealer brokers declined to comment. Matt Mittenthal, a spokesman for Schneiderman, declined to comment.

The investigation, still in its early stages, is examining whether fake bids and offers in FX options were posted on the electronic trading platforms hosted by the interdealer brokers, in order to ramp up interest from options traders in largely illiquid emerging-market currencies, according to the person familiar with the investigation.

Shares of ICAP dropped 1 percent after the news broke, while Tullett Prebon lost 1.1 percent. BGC slumped 5.6 percent, the largest one-day decline since March 2014. Cie. Financiere Tradition rose 0.6 percent.

Prior Cases

Regulators and prosecutors have spent 2015 trying to root out fake orders from U.S. markets. Spoofing — in which traders attempt to drive prices in a favorable direction with orders they don’t actually plan to execute — has been the subject of several high-profile cases, including the arrest of London-based trader Navinder Sarao and the conviction in Chicago of Michael Coscia.

Schneiderman is targeting a related infraction. When something isn’t trading much or at all, a broker can be tempted to create the illusion of supply or demand by entering fake orders. The U.S. Securities and Exchange Commission went after that sort of behavior earlier this year when it fined Sand Hill Exchange, which permitted trading of contracts tied to the value of private companies. The trouble was, customers weren’t showing up, so Sand Hill created software robots that traded with each other to create the appearance of a deep market.

Trading Networks

The attorney general’s new investigation of foreign-exchange options comes after several banks paid nearly $6 billion earlier this year for colluding to rig currencies.

Interdealer brokers act as middlemen for trades between the world’s biggest banks, helping sellers at one firm find a buyer at another. As the industry’s name implies, its participants were traditionally only banks, not money managers such as mutual-fund operators.

Inside that closed community, scandals have cropped up. ICAP was fined $88 million in 2013 by U.S. and British officials for allegedly helping banks rig Libor, a key lending rate. Traders at firms including ICAP and Tullett Prebon are on trial now for allegedly helping ex-Citigroup Inc. trader Tom Hayes manipulate Libor.

ICAP is the largest interdealer broker — generating 1.3 billion pounds ($2.1 billion) of revenue in its most recent fiscal year — although it’s in the process of selling its older business that negotiates trades over the phone to Tullett Prebon.

Schneiderman is going after the brokers using the unique powers granted to him by New York’s Martin Act, which give him broad powers to crack down on white-collar crime.