Chicago Board of Trade’s Surveillance Criticized : CFTC Calls System for Detecting Abuses ‘Deficient,’ Says Inquiries Delayed

WASHINGTON —  The Commodity Futures Trading Commission said Tuesday that the scandal-plagued Chicago Board of Trade has a seriously “deficient” system for detecting trading abuses. The agency charged that investigations are delayed too long and ordered the Board of Trade to send its investigative logs to Washington on a monthly basis.

The criticism focused on the effectiveness of the exchange’s computerized trade surveillance system.

Recent revelations of potentially massive scandals have focused public and regulatory attention on the Chicago Board of Trade and on the city’s other major futures market, the Chicago Mercantile Exchange. Federal investigations at both exchanges reportedly have uncovered widespread patterns of fraud involving rigged prices and phony bidding.

The investigations, which are being conducted by the FBI and the U.S. attorney’s office in Chicago, focus on futures trading in Treasury bills and in foreign currencies. A futures contract is an agreement to buy or sell a specified quantity of a commodity or financial instrument at a specified price on a set date in the future.

Undercover FBI agents working as traders at the Chicago exchanges reportedly found cases in which brokers completed transactions at prices above or below true market levels and then pocketed the difference.

This type of abuse presumably should be detected by the board of trade investigative system. But the Board of Trade procedures were found lacking in speed and efficiency, according to the CFTC.

The board was very slow in its handling of investigations of potential trading abuses, according to the CFTC study. These are carried out through a computer-assisted operation known as a Trade Practice Investigation, or TPI. The CFTC regulatory staff reviewed TPI cases and found “lengthy delays,” according to its 145-page report.

There were 292 completed cases, taking from four months to 22 months to close. However, 224 of the cases took more than one year from initial investigation to final action.

“This represents an absence of control over the progress of TPIs and a lack of attention to closing cases promptly once investigative work has been completed,” the CFTC report said.

In one case, involving alleged prearranged trading in options on corn, the Board of Trade received a complaint on Oct. 6, 1986. But the two members involved were not interviewed until the following August and September, when the traders said essentially that they couldn’t remember what had happened.

Responding to the CFTC report, the Board of Trade said Tuesday that it has “always cooperated fully with the CFTC in their reviews of our enforcement practices and we intend to do so with this review.”

Chairman Karsten Mahlmann said: “It should be understood that most of the material on which the report is based is more than 1 1/2 years old, and many of the CFTC’s recommendations have been implemented.”

The board has increased the size of its audit office by 75% and “fully computerized our audit trail surveillance systems,” he said. In addition, board committees have been “examining ways to enhance our audit trail, surveillance and disciplinary action capabilities,” according to Mahlmann.

The board has allocated $1 million to improve its computerized system, “which will allow us to audit 100% of all trades daily,” he said. “That is tantamount to the Internal Revenue Service auditing 100% of all taxpayers in the country.”

The CFTC’s division of trading and markets conducted the study, which covered the period from July, 1987, through April, 1988. CFTC staff met with Board of Trade personnel from April, 1988, until October and then examined a sample of investigative case files, market surveillance logs and audits.