The document concludes that “any U.S. investor seeking to transactin FSFPs (and particularly ECPs that do not qualify as QIBs), and any firm seeking to intermediate such a transaction, should consult an attorney to determine whether such activities would be inconsistent with the federal securities laws.”

The FSA fined J P Morgan Securities Ltd £33.32 million for failing to protect client money by segregating it appropriately.

Under the FSA’s client money rules, firms are required to keep client money separate from the firm’s money in segregated accounts with trust status.  This helps to protect client money in the event of the firm’s insolvency.

Between 1 November 2002 and 8 July 2009, JPMSL failed to segregate the client money held by its futures and options business (F&O) with JPMorgan Chase Bank N.A (JPMCB).  The error occurred following the merger of JPMorgan and Chase. Instead of being held overnight in a segregated money market account, JPMSL’s F&O client money was held in an unsegregated account with JPMCB. This error remained undetected for nearly seven years.

During this period, the client money balance held by the F&O business of JPMSL varied between $1.9 billion (in December 2002) and $23 billion (in October 2008). Had the firm become insolvent at any time during this period, this client money would have been at risk of loss.

The CFTC also announced that it obtained an emergency order from Judge Percy Anderson of the U.S. District Court for the Central District of California, on May 20, 2010, the same day the complaint was filed. The order freezes the defendants’ assets and prohibits defendants from destroying documents or denying CFTC access to their books and records.

The CFTC’s complaint alleges that since at least August 2008, Gonzalez, Naranjo and NGI fraudulently solicited and accepted approximately $3.65 million from at least 165 members of the Los Angeles-area Spanish speaking community for various investments, including commodity futures trading. The defendants falsely claimed to customers that they would double their money within a year in oil, gold, silver and other commodities.

Gonzalez was previously arrested in California on illegal immigration charges and is currently incarcerated. Gonzalez was indicted on May 20, 2010, for mail and wire fraud.

The CFTC’s complaint seeks orders requiring the defendants to provide the CFTC with continuing access to books and records and to make an accounting with information necessary to determine the amounts received from and paid to NGI investors. The CFTC also requests that the court issue orders of preliminary and permanent injunction against the defendants and order a return of alleged ill-gotten gains, repayments to defrauded customers and monetary penalties.

“The market events of May 6th clearly highlight that technology drives the structure and function of the markets. Trades now take place in milliseconds and will soon take place even faster. We must develop a deep understanding of technological innovation and what it means for the markets we oversee. Therefore, I am pleased that the Commission has agreed to my request to reinstate this Committee,” stated O’Malia, who has pushed for the creation of the Committee since his appointment.

The Commission’s original TAC ceased operation when its, chapter expired in 2005. Since that time, technology has become increasingly important to participants in the derivatives markets—by providing participants with market information, trade modeling, trade execution, risk management and back office support.

The Committee will have a two-year term, during which the Committee will conduct public meetings, receive written recommendations from its members and the public and submit reports to the Commission that will inform the Commission of its technological opportunities and the need for regulation to support the Commission’s mission.

The Complaint alleged that IFX failed to uphold high ethical standards by taking out high interest loans to repay earlier loans without a reasonable basis for believing the firm would be able to repay the new loans. Additionally, the Complaint charged that IFX failed to list US Capital Management, Inc. as a principal of the firm and failed to cooperate fully with NFA during the audit of IFX. The Complaint also charged that IFX and Coleman failed to supervise IFX’s employees in the conduct of their forex business and operations.

By Sarah N. Lynch, Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- An economist at the Commodity Futures Trading Commission is trying to determine if some high-frequency trading strategies in futures contracts tied to the Standard & Poor’s 500 index may moderate price swings like those seen on May 6.

CFTC economist Andrei Kirilenko is working with California Institute of Technology mathematical finance professor Jaksa Cvitanic, and the two are looking at a trading strategy known as “sniping,” which entails quickly submitting buy and sell orders of a certain size and then immediately cancelling them if they cannot be executed right away. They are theorizing that this trading strategy actually moderates price swings.

Cvitanic said in an interview that they began the study in June 2009, but they haven’t yet begun to analyze the trading data to see if the theory holds true. Kirilenko couldn’t be reached for comment.

The two economists published their theoretical model on high-frequency trading in a March working paper. The study is still in its early stages. But the outcome could be important for regulators to consider as they examine the reasons why the Dow Jones Industrial Average fell nearly 1,000 points on May 6 before quickly rebounding. Regulators are studying, among other things, what role, if any, high-frequency traders who execute transactions at lightning speeds may have played.

CFTC Commissioner Scott O’Malia said Wednesday that Kirilenko will be asked to discuss this paper and others on which he’s working in July at the first meeting of a new technology advisory committee. The CFTC advisory panel of experts will study high-frequency trading, co-location services and other technology issues.

Proprietary trading firms have become an increasingly larger percentage of trading volume on equities and derivatives exchanges. A report released by the CFTC and Securities and Exchange Commission this week suggested that the May 6 price volatility may have been exacerbated after some electronic liquidity providers shut down or scaled back trading activity.

CME Group (CME), which lists the E-mini futures contract tied to the S&P 500, has said that trading of the E-mini didn’t spark the massive sell-off in the equities markets and that high-frequency traders were not to blame. High- frequency traders make up about 36% of all volume across CME’s various trading platforms and 40% on the E-mini, according to CME’s Executive Chairman Terry Duffy.

CFTC Chairman Gary Gensler said in March his agency plans to draft a proposal around co-location services, which allow traders to place their computers in the same building as the trading platform.

The SEC, meanwhile, is looking at high-frequency trading as part of a much broader review of market structure issues including co-location, dark pools and flash orders, among other things.

-By Sarah N. Lynch, Dow Jones Newswires, 202-862-6634; sarah.lynch@ dowjones.com

(Jacob Bunge contributed to this article.)

  (END) Dow Jones Newswires
  05-19-101809ET
  Copyright (c) 2010 Dow Jones & Company, Inc.

Read more: http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201005191809dowjonesdjonline000615&title=cftc-economist-theorizes-high-frequency-traders-can-tame-prices#ixzz0p0crUMZB

According to the CFTC complaint, filed on May 17, 2010, in the U.S. District Court for the Eastern District of New York, Shalhoub solicited approximately $300,000 from at least 12 of his ex-wife’s friends and family to trade futures. The complaint further charges that Shalhoub and JSI commingled customer money with Shalhoub’s personal funds and that Shalhoub misappropriated at least $154,500 of customer funds for his personal use.

Specifically, the complaint charges that Shalhoub promised customers monthly returns ranging from 10 to 36 percent, while representing that customers’ original investment could be returned at any time. Shalhoub further claimed that the return was produced by his successful trading. However, any purported “profits” paid to customers came from existing customers’ original principal and/or from money invested by subsequent customers, similar to a Ponzi scheme.

Finally, the complaint alleges that, to conceal and perpetuate the fraud, Shalhoub provided false account statements to customers, misrepresenting that their accounts were increasing by as much as 5.2 percent per week when, in fact, the accounts were losing money every month.

In its continuing litigation, the CFTC seeks disgorgement of ill-gotten gains, restitution to defrauded customers, civil monetary penalties and trading and registration bans.

(1) possible linkage between the precipitous decline in the prices of stock index products such as index ETFs and the E-mini S&P 500 futures, on the one hand, and simultaneous and subsequent waves of selling in individual securities, on the other, and the extent to which activity in one market may have led the others;

(2) a generalized severe mismatch in liquidity, as evinced by sharply lower trading prices and possibly exacerbated by the withdrawal of liquidity by electronic market makers and the use of market orders, including automated stop-loss market orders designed to protect gains in recent market advances;

(3) the extent to which the liquidity mismatch may have been exacerbated by disparate trading conventions among various exchanges, whereby trading was slowed in one venue, while continuing as normal in another;

(4) the need to examine the use of “stub quotes”, which are designed to technically meet a requirement to provide a “two sided quote” but are at such low or high prices that they are not intended to be executed;

(5) the use of market orders, stop loss market orders and stop loss limit orders that, when coupled with sharp declines in prices, for both equity and futures markets, might have contributed to market instability and a temporary breakdown in orderly trading; and

(6) the impact on Exchange Traded Funds (ETFs), which suffered a disproportionate number of broken trades relative to other securities.

The agencies found no evidence that these events were triggered by “fat finger” errors, computer hacking, or terrorist activity, although it cannot completely rule out these possibilities.

Capital Growth Fund Ltd. that the fund had lost all of its money due to a defaulting broker when, in fact, most of its losses were due to trading losses, and of providing false and misleading information to NFA.

 The NFA commenced an inquiry into Scevola’s operations Based on information that a former Lake Shore Asset Management Limited principal, Laurence Rosenberg, was affiliated with Scevola and Resolute Capital. Lake shore had been previously barred from NFA membership after misappropriating more than $11 million of participant’s money.

On December 14, 2009, Mitchell filed an Answer to the Complaint in which he denied the material allegations contained therein.

On May 17, 2010, a NFA Hearing Panel issued a Decision accepting Scevola’s settlement offer and permanently barred him from NFA membership, associate membership and principal status with any NFA Member.

Regulation 30.10 generally provides that persons located and doing business outside the U.S. and who are subject to a comparable regulatory framework in the country in which they are located may qualify for an exemption from the application of certain Commission regulations, including relief from registration as a futures commission merchant.  Appendix A to Part 30 of the CFTC’s Regulations generally outlines the procedure for a foreign regulator or self-regulatory organization seeking to obtain relief on behalf of a foreign broker subject to its oversight.  As the operating division responsible for evaluating applications pursuant to Regulation 30.10, the Division of Clearing and Intermediary Oversight prepared and published a more detailed description of the information set forth in Appendix A.  In particular, the guidance is intended to streamline the application process by informing prospective Regulation 30.10 applicants of the information generally requested by DCIO when evaluating applications for Regulation 30.10 relief.