Among the government’s witnesses are former JPMorgan employees, including John Edmonds, who told prosecutors about Nowak’s trading in 2018, as well as Armand Nakkab, Kristen Pfeiffer and Christian Trunz, court records show. Another is former Bear Stearns and Bank of Nova Scotia trader Corey Flaum, who pleaded guilty to price manipulation in 2019. The defense witness list includes Tudor Capital trader James Phelan, former Soros Fund Management trader James Ragusa and Moore Capital Management trader Joseph Giunta.
The trial will be closely watched by gold market participants eager to learn more about how JPMorgan operated its trading desk, including evidence from internal chat logs showing how the team communicated.
In one chat entry from May 27, 2008, a bank employee informed Nowak that Smith had “just bid it up to...sell,” according to the indictment.
In another, a colleague warned his teammates that “gregg is bidding up on futures trying to get some off.” At that moment, Smith placed an order to sell seven gold futures while placing offers to buy 77, prosecutors said. The activity was viewable for 59 seconds before Smith sold three of his contracts and canceled his swarm of buy orders. “Appreesh,” the colleague responded, “that worked!”
JPMorgan, which has already admitted wrongdoing and agreed to cooperate with prosecutors, has been fighting to keep some of its internal communications out of the trial, including messages involving Mike Camacho, who was head of global metals.
Prosecutors said in court filings they’ll seek to show jurors communications between Ruffo and former Moore Capital Management money manager Christopher Pia about an allegedly illicit trade.
High-Frequency Trading
Market players say that before Dodd-Frank, spoofing as it’s known today was prevalent on Wall Street. Some traders sought to bluff rivals like high-frequency trading firms to gain an edge, canceling orders before a trade was executed.
“If you have a large order and the algorithms pick up that you are selling selling selling, then they are going to jump in front of you,” said Matthew Mazur, an attorney at Dechert LLP, who defended a Deutsche Bank trader in 2020. “If you telegraph to the market what you actually want to do, you would be killed.”
That argument hasn’t worked with jurors in recent trials, where defense lawyers asserted that their clients intended to execute their trades, but canceled for legitimate reasons. In the trial for the Deutsche Bank traders, their attorneys argued that fooling competitors in financial markets is no different than bluffing in a high-stakes poker game.
“The defense is going to say the market is changing and the traders wanted to change their minds and make adjustments,” said Soltes, the Harvard professor. “But you have to have a genuine willingness to execute that trade.”
The government also intends to bring in experts in algorithmic trading, including David Pettey of Susquehanna International Group LLP. Prosecutors allege the defendants broke the law to try to outsmart firms like Susquehanna, whose edge in speed allowed them to get ahead of bankers placing high-value orders.
By placing orders with the intent to cancel them before execution, the defendants could cause markets to react to a false picture of supply and demand, creating an opening to complete trades and moving prices in favorable directions, prosecutors said in their indictment.
The case is US v. Smith et al, 19-cr-00669, US District Court, Northern District of Illinois (Chicago)
--With assistance from Jack Farchy.
This article was provided by Bloomberg News.