Exchanges seek to balance policing and profitability

Ordinarily, market abuse and manipulation cases take forever.

More than five years after UK watchdogs dramatically raided Moore Capital, Deutsche Bank and a series of other London companies, most of the people who were charged following the insider dealing probe have yet to stand trial. Similarly, global investigations of the Libor scandal are still ticking on more than six years after the first information requests were sent out.

But, this week, the CME futures exchange may well have set a new record for investigative speed. Traders Heet Khara and Nasim Salim were suspended for 60 days for allegedly colluding to move gold futures prices by placing and cancelling huge numbers of orders - an illegal technique known as "layering". The pair had allegedly misbehaved right up until April 28, just two days before the suspension was imposed.

The CME's rapid response comes at a time when it is under fire for its role in the case of Navinder Singh Sarao, the British trader accused by US prosecutors of contributing to the 2010 flash crash that sent American markets sharply down for 20 minutes.

According to the criminal complaint, the CME knew as early as 2009 that Mr Sarao, who is fighting extradition to the US, was placing and cancelling lots of orders. But the exchange appears to have taken no action beyond sending a complaining letter, which happened to arrive on the day of the flash crash. Mr Sarao later emailed his broker that he had called the CME and "told 'em to kiss my ass", the complaint said.

The Sarao case highlights the potential problems with the current US system of relying on "self regulatory organisations", including the exchanges, to do much of the front line policing of markets. They are supposed to make sure traders abide by the rules and refer serious misbehaviour on to government regulators.

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A second problem with the new order was also highlighted this week when shareholder.com, a Nasdaq unit that manages investor relations for public companies, inadvertently released Twitter's quarterly results early. Though the information was posted on Twitter's website for just 45 seconds on Wednesday, an independent data gathering company called Selerity found it and put the information on, you guessed it, Twitter.

It showed that the social media platform had missed revenue expectations, so Twitter's share price tanked. Investors who were trading the shares at the time will want a thorough investigation of what went wrong, and whether anyone profited improperly. In this case, Twitter is listed on the NYSE and the high profile snafu has caught the attention of federal regulators. But what if the company and the share price fall had been smaller and listed on Nasdaq?

JPMorgan Chase chief executive Jamie Dimon often argues that exchanges and other central counterparties are the next big risk to financial stability. That's definitely the pot calling the kettle black. But the pervasive and sometimes conflicted roles played by the various exchanges deserve greater scrutiny.

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