Summary: In response to a congressional request, GAO reviewed how the Commodity Futures Trading Commission (CFTC), Chicago Board of Trade (CBT), and Chicago Mercantile Exchange (CME) oversee futures market trading practices, focusing on the: (1) adequacy of oversight controls; (2) disciplinary actions the exchanges have taken; and (3) market reforms the exchanges have considered or implemented.
GAO found that: (1) CME and CBT identify and investigate trade practice abuses using similar programs, including reviewing audit trails for trade information; (2) the CFTC oversight program includes reviewing data from exchange audit trails, investigating potential trade abuses, and reviewing rule enforcement; (3) CFTC requires exchanges to determine trade execution times within 1 minute, and the resulting enhanced computerized audit trails have improved trade abuse detection and investigation; (4) due to the large numbers of trades at different prices within 1 minute, CFTC may need to reduce the 1-minute standard; and (5) CBT improved the usefulness of audit trail data by more precisely timing trades in response to CFTC recommendations. GAO also found that: (1) the number of penalties for trading violations increased at CME, while CBT penalties fluctuated; (2) CME fines ranged from about $155,000 to about $1.7 million and totalled about $3.6 million from 1984 through 1988, while CBT fines ranged from about $65,000 to $225,000 and totalled $812,000 during the same period; (3) both exchanges averaged about two expulsions per year; and (4) CFTC enforcement actions since 1986 resulted in over $900,000 in penalties, 35 cease-and-desist orders, 43 trading suspensions, and 31 registration suspensions. In addition, GAO found that: (1) both exchanges formed committees to study how to reduce abusive trade practices and reform exchange rules and procedures; and (2) exchange officials stated that, although some proposed changes could reduce trade practice abuses, they could increase trade costs, reduce liquidity, and undermine market efficiency.
