Analysis on Behalf of an International Commodity Dealer Under a CFTC Investigation

The Situation

NERA provided analysis and reports on behalf of an international commodity dealer who was under a CFTC investigation regarding trading in commodities markets. The CFTC was concerned by a variety of trading behaviors including certain trading in EFP instruments, concentrated trading in after-hours markets, concentrated intraday trading over short time periods, and trading during the particularly volatile markets in September and October of 2008. The CFTC notified the dealer of several specific days for which it requested independent analysis of the trader's conduct.

NERA's Role

NERA examined the intraday trading data and the dealer’s transactions, and presented its independent findings to the CFTC. Having accepted NERA’s explanations, the CFTC asked NERA to address the tendency of the dealer to "sell on the downtick," or execute consecutive sales at successively lower pricing, sometimes coinciding with larger price movements. NERA explained the economics of the tendencies that the CFTC observed, drawing on knowledge of the liquidity facilitation function that commodity dealers carry out and the inventory risk management practices of market-makers. NERA also performed a detailed data analysis of comparables using the futures market trade register to show that the dealer's tendencies were observed widely across the marketplace by many other trading accounts.

The Result

NERA issued a written report to the CFTC detailing its economic analyses and quantitative measures.