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.

The federal regulation of futures markets dates back to the Grain Futures Act of 1922, and thus is older than the US government’s securities laws. In the beginning, the primary emphasis of the regulatory regime was to push all futures trading on exchanges that were licensed by the government, with the belief that the exchanges would police trading on their markets for manipulation of the prices of commodities and related misconduct. With time, the government took a more active role in regulating the markets, but the system’s overall emphasis on self-regulation – by exchanges and, starting in the 1980s, also by the NFA – remains to this day. While the primary purpose of federal regulation of futures and derivatives has been the elimination (or, more accurately, the attempted elimination) of market manipulation and disruptive trading practices, other important purposes of the CEA include reducing systemic risk and preventing fraud.

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.