At the start of 2020, the COVID-19 pandemic posed an unprecedented threat to the economy and stock market valuations. Stock prices plummeted in March 2020 as the nation shut down, and many public companies suspended their forecasts because they no longer had confidence that they could predict their financial performance. Surprisingly, the market started to recover over the spring and summer. By the fall, the S&P 500 reached the level it was at before the start of the pandemic. By the end of 2020, the market saw a significant annual gain.

At some point, it becomes almost impossible for management to deliver on accelerating expectations without faltering, just as anyone would eventually stumble on a treadmill that keeps moving faster. McKinsey & Co., Valuation: Measuring and Managing the Value of Companies, 2020 The typical public corporation now runs on a valuation treadmill. If its stock is traded widely in public markets, it must take care to keep pace with market expectations. Whether it be through developing transformative new products or consistently meeting quarterly financial projections, a public company must continually convince investors that it will generate profits in future years just to maintain its stock price. If investors become concerned that a company’s profitability is declining, they can drastically readjust its valuation.

US laws and regulations prohibit people from lying, deceiving, or otherwise tricking prospective and actual customers in connection with buying or selling futures and other derivatives. For example, the law considers it fraud for a person to solicit money from customers to invest in a hedge fund (i.e., commodity pool) that purportedly will trade stock index futures and then (as actually happened in one 2009 CFTC civil enforcement case) use customer money to instead buy, among other things, a collection of 1,348 rare, stuffed teddy bears for more than $3 million. This prohibition should not be surprising, as just about every financial regulatory regime outlaws fraud. This chapter has to cover more territory than some of the other parts of this book because one of the central purposes behind the regulation of financial markets is the prevention of fraud, which can take many forms.

In folklore, a will-o’-the-wisp is a supernatural ghostly floating light found in swamps and marshes that leads unfortunate travelers off safe paths and into dangerous areas. Although “spoof” orders for trades in futures contracts (and other financial instruments) are neither supernatural nor found in swamps, they are similar to will-o’-the-wisps in that spoof orders are fleeting presences intent on leading others astray. Modern futures market will-o’the-wisps, however, are often software algorithms that travel through trading platforms at superhuman speeds, and not the fiery fairy beings portrayed in legends.

The CEA and CFTC Regulations have several provisions that specifically prohibit several specific kinds of trading practices that are categorically considered disruptive or deceptive. Unlike the broad prohibitions against conduct that constitutes malleable and amorphous legal concepts such as fraud and manipulation, the antidisruptive practices proscriptions in the CEA are, generally speaking, more narrow because they explicitly target specific types of trading activities. While these improper disruptive trading practices originated on the crowded trading floors of futures exchanges, many of these tactics have continued to occur in electronic trading environments, such as on CME’s Globex. Indeed, electronic trading environments appear to facilitate some disruptive trading practices. These tactics have colorful names such as spoofing, wash trading, and banging (or marking) the close.