DRW, a Chicago-based proprietary trading company, and its owner Don Wilson, a well-known figure in the derivatives markets who was by US regulator the Commodity Futures Trading Commission (CFTC), are due to appear in court, according to a report in the Financial Times. Wilson is expected to testify in his own defence as he battles the CFTC’s lawsuit.
The lawsuit originally caught the attention of the trading industry as Wilson is a prolific figure in the derivatives markets. DRW was alleged to have made at least $20 million after rigging prices of an interest-rate futures contract listed by Nasdaq. Although most manipulation cases tend to be settled before they come to trial, Wilson opted for a showdown instead.
Wilson began his trading career in 1989 on the floor of the Chicago Mercantile Exchange. The Chicago-based firm DRW bears his initials, and now has around 725 employees trading contracts pegged to interest rates, oil, natural gas, crops and equities on 40 exchanges around the world. Those trading derivatives or futures often end up trading with DRW due to its large presence in the marketplace.
When Lehman Brothers collapsed in September 2008, the CME held an emergency auction of its five futures portfolios. DRW scored three of them even as markets were melting down, in a trade estimated to have earned it $300 million, according to the FT. DRW has also expanded past the financial crisis while regulators forced banks to reduce their risks.
The case involves DRW’s trading in derivatives contracts called Idex USD Three-Month Interest Rate Swap Futures, which were offered on an exchange owned by Nasdaq. In the summer of 2010, DRW spotted a potentially lucrative opportunity.
DRW believed that the Idex futures were mispriced relative to a similar interest-rate swaps market that traded off-exchange and placed a $350 million bet that the futures prices would rise. By September 2010, a DRW employee wrote in an email that anyone who took the other side of its trade would be “suckers”.
Over the following months, the futures price did not rise as DRW had expected, and in early 2011, DRW began placing bids electronically, which were then incorporated into settlement prices.
The CFTC alleges that DRW’s electronic bids were manipulative because they shoved prices in a direction that favoured the firm. CFTC lawyers argued that, ultimately, the defendants distorted the market price for their personal benefit over a thousand times and profited by nearly $13 million.
According to DRW’s lawyers, the bids were “based on legitimate economic rationales”, and to the extent that settlement prices reflected the company’s bids, they were not manipulated.
The wrangling has exceeded the confines of the case and CFTC lawyers noted DRW’s “extrajudicial attempts” to press the CFTC to dismiss the case included approaching the agency’s senior leadership and complaining to the US Congress.
DRW meanwhile, claims to be “exercising their rights to defend themselves”. The trial is scheduled to start on Thursday.