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Arctos Capital Accuses Anonymous Commodities Traders of Collusion

Posted  May 18, 2011

Several anonymous commodities traders are being accused of manipulating trades for futures contracts in a multi-million dollar conspiracy to keep commodities trading firm Arctos Capital from participating in the market

In Arctos Capital LLC v. John Does 1-5, Arctos Capital is seeking $60 million in damages from several anonymous traders of continuous commodities index (“CCI”) futures contracts for allegedly colluding to exclude it from the ICE Futures U.S. trading market.  Arctos Capital’s complaint in the U.S. District Court for the Southern District of New York claims the anonymous traders violated several laws, including the Sherman Act and the Commodities Exchange Act.

The ICE Futures U.S. trading market is a private, electronic exchange in which traders buy and sell CCI futures and options contracts.  Such markets are regulated by the Commodity Futures Trading Commission.  The CCI includes 17 commodity futures, including coffee, cotton, crude oil, cattle, gold, and soybeans.  Arctos Capital alleges that the market is very concentrated with few traders.  For example, fewer than 10 trades are completed in some months.

CCI futures contracts are standardized contracts between a buyer and seller to buy or sell a specific asset on a specific future date.  Under this arrangement, the buyer takes a “long” position, and the seller assumes the “short” position.  CCI future contracts are cash-settled upon expiration, meaning that cash is transferred on the settlement date from the party who sustains a loss to the party who realizes a profit.

According to Arctos Capital’s complaint, there are two ways to maintain a long-term “long” position in the ICE Futures U.S. market.

The first way to maintain a long position is for the holder of a contract to purchase another CCI futures contract with a date further in the future, and then allow the current contract to expire.  This is known as trading on the “outright” market.

The second way to maintain a long position is for a participant to trade the “spread,” which means simultaneously selling the current contract and buying a contract with date further in the future.

Arctos Capital alleges that one participant in the ICE Futures U.S. trading market holds a large “long” position, and as a result, a large number of CCI futures contracts trade over the course of a few days prior to the expiration of each contract.  According to its complaint, Arctos Capital saw a business opportunity in this trading pattern and entered the market as a CCI futures seller in 2009.

However, as soon as Arctos Capital began to trade on the ICE Futures U.S. market, it allegedly noticed a pattern of illogical trades in reaction to its entrance into the market.  For example, Artcos Capital offered CCI futures contracts for sale and received a bid, but the anonymous bidder immediately and “inexplicably” reduced its number of bids.  At the same time, an anonymous seller suddenly reduced its contract price so that buyers began to purchase CCI future contracts from it instead of Arctos Capital.  Arctos Capital alleges that these actions serve as evidence of communication between the anonymous bidders and sellers, and those actions prevented it from meaningful participation in the market.

Arctos Capital alleges that collusive activity continued into 2010 that continued to prevent its participation in the market, including traders moving to the “outright” market (a riskier and less efficient form of trading), trades occurring almost simultaneously for which no other party could compete, and selling CCI futures contracts below historical prices.

Taken together, Arctos Capital believes these actions demonstrate that participants in the ICE Futures U.S. market are communicating with each other to prevent competition.

Tagged in: Antitrust Litigation,