Summary: Pursuant to a congressional request, GAO assessed the Commodity Futures Trading Commission's (CFTC) and futures exchanges' effectiveness in deterring, detecting, and punishing trade practice abuses.
GAO found that: (1) futures exchanges did not always independently, precisely, and completely time all trades; (2) improved trade timing could eliminate trading information manipulations that give noncompetitive trades the appearance of competitive execution; (3) although the exchanges attempted to reconstruct trade sequences through audits, control weaknesses existed in each exchange that allowed dishonest brokers opportunities to manipulate timing; (4) the exchanges planned to develop electronic audit trail systems to record transactions using hand-held terminals, but they did not plan full implementation for over a year and did not know the extent to which they would use the systems to control abuses; (5) although CFTC reviewed the exchanges' surveillance programs, it did not review system documentation, test screening programs to determine whether the systems operated as intended, or require independent documentation assessments; (6) the number and severity of disciplinary actions varied by exchange but generally increased between 1984 and 1989; and (7) CFTC used investigative and disciplinary action information to judge specific exchange decisions, but did not formally analyze trends or compare results across exchanges, since there were no uniform definitions to classify actions involving floor trade practice abuses.
