Finra has filed a complaint that alleges a former Merrill Lynch securities broker and trader engaged in fraudulent trading for more than six years.
The complaint charges Sidney Lebental with engaging in 523 instances of “spoofing” between October 2013 and February 2021. Finra defines spoofing as “a type of fraudulent trading that involves the use of non-bona fide orders to induce executions of bona fide orders entered on the opposite side of the market in the same security or a correlated product.”
Specifically, Lebental is accused of entering fake orders to either buy or sell 30-year Treasury bonds while simultaneously executing a real order on the opposite side of the ledger for the same security or a related T-bond future. The deception enabled the true orders to execute at more favorable prices than they otherwise would have, according to Finra.
Immediately afterward, he would cancel the bogus orders, the regulator said.
According to the complaint, those cancellations frequently occurred as quickly as one second after they were entered.
"The non–bona fide order created a false appearance of market depth and activity so that Lebental’s bona fide order would receive favorable executions at better prices," the complaint said.
Lebental couldn't be reached for comment.
Lebental, who first registered with Finra in 2008 as a broker for Deutsche Bank Securities, became head of Merrill Lynch’s U.S. Treasury desk in October 2014, where he supervised all the traders in that department, according to Finra. In 2018 he was promoted to a supervisory role for multiple U.S. trading desks there. After May 2019, when Merrill Lynch’s investment banking and trading divisions were reorganized as BofA Securities, Lebental had similar responsibility for BofA, Finra said. He quit in May 2021.
Spoofing is used to affect the price or volume of a security by deceiving other market participants to trade at a time, price, or quantity that they otherwise might not have done, according to Finra. In other words, by putting in bogus orders that you intend to cancel right away, you inject false information into the marketplace.
With Treasury bonds, the spread between bid and offer prices is typically very thin—often a matter of just a few cents, according to Finra. But the market is so big and liquid, with a high volume of large orders, that the price differences can be significant.
As a market maker, Lebental could buy at the best bid price and sell at the best offer price, Finra said. He had access to the order routing system, where he could view the quantities of securities that were available at various prices before placing orders.
According to Finra’s Department of Enforcement, this degree of access gave him the ability to easily manipulate markets, and prices, with the bogus orders. Lebental’s alleged activities violated not only several Finra rules but also multiple provisions of the Securities Exchange Act of 1934, the complaint said.
The actions constituted outright fraud, deception, and unethical conduct, Finra concluded. Its enforcement department recommended that appropriate sanctions, which may include a monetary penalty, be imposed.