By Karen Freifeld
NEW YORK (Reuters) - A "massive amount of misconduct" in futures, options and swaps markets goes undetected because of insufficient data mining, Aitan Goelman, who until last month was enforcement chief for the top U.S. derivatives regulator, said in an interview.
Goelman said a lack of resources meant the U.S. Commodity Futures Trading Commission (CFTC) did not have the sophisticated software and staff necessary to uncover many of the suspicious trading patterns within the 325 million records filed each day.
Goelman said there is much more manipulation, insider trading, front-running and Ponzi scheming in the markets than is being prosecuted, even though the CFTC receives the data from industry participants and exchanges and gained enhanced enforcement authority under a 2010 financial reform law.
A handful of cases were brought under Goelman over spoofing, the illegal practice of placing orders without intending to execute them. Goelman, who believes the practice is widespread, is credited with bringing groundbreaking cases utilizing the anti-spoofing provision and other powers provided by the Dodd-Frank Act.
"One of my regrets is there's such a massive amount of misconduct in the market we're just not pursuing,” said Goelman, who left the CFTC after the change to a Republican administration and nearly three years as enforcement chief.
"We could do a lot more manipulation cases. We have all these new enforcement tools and this vastly expanded jurisdiction and data," Goelman said in the interview. "But you have to be acutely conscious about the limited resources."
Derivatives played a central role in the 2008 financial crisis. In the aftermath, through Dodd-Frank, the CFTC went from regulating the now $50 trillion futures and options markets to gaining primary oversight for the over-the-counter U.S. swaps market, now estimated at $300 trillion.
CFTC Commissioner Sharon Bowen, a Democrat, said in an emailed statement that the market data the agency receives is "of little use if we lack the resources to fully analyze it."
Tyson Slocum, a staffer with the consumer advocacy group Public Citizen who serves on an advisory committee to the CFTC, said the regulator does what it can with the resources it is provided.
But Slocum and Dennis Kelleher, chief executive of government watchdog Better Markets, said Wall Street lobbying left the CFTC chronically underfunded.
Kelleher described that as "one of the biggest scandals in this town."
The CFTC's annual budget of $250 million is more than double the $111 million it was allotted in 2008, with just over 20 percent designated for enforcement.
The U.S. Securities and Exchange Commission, by contrast, had a $1.6 billion budget in fiscal 2016, with one-third slotted for enforcement.
Acting CFTC chairman J. Christopher Giancarlo said in a speech last week there would be aggressive enforcement by the CFTC under the administration of President Donald Trump.
Giancarlo, a Republican nominated by Trump to serve as permanent chair, has tapped James McDonald, who just left the U.S. Attorney's office in Manhattan, to oversee the enforcement unit, sources have told Reuters.
Steven Adamske, a spokesman for the CFTC, declined to comment on how much misconduct might be going undetected.
Adamske said the CFTC's surveillance unit looks at anomalies on a daily basis, spikes and drops in the market that may not be easily explained, and refers questionable activity to the enforcement division.
"Now and always, the CFTC works diligently within the budget set by Congress and the administration to foster open, transparent, competitive and financially sound markets," he said.
The commission's budget is funded solely through congressional appropriations, with fines it collects returned to the U.S. Treasury.
The U.S. Senate and U.S. House of Representatives appropriations committees either declined comment or did not respond to a request for comment on whether lobbyists influenced the outcome for the commission.
Two-thirds of leads on misconduct that come into the "triage unit" of the CFTC’s enforcement division are not pursued, in part because of a lack of resources, Goelman said. A lack of jurisdiction and lack of evidence also play a role, he said.
"It's really an untenable situation," Goelman said. He cited two cases that, if they had gone to trial, he said would have used up more than half his operating budget for 2017.
They were the case of former New Jersey governor Jon Corzine who agreed to a $5 million settlement over his role in MF Global Holdings Ltd's unlawful use of nearly $1 billion in customer funds and Igor Oystacher and his Chicago firm, 3Red Trading LLC, agreeing to pay $2.5 million to settle spoofing allegations in more than 50 trades between 2011 and 2014.