Refco named in Liffe probe

City braced for inquiry into market rigging
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The Independent Online
REFCO Overseas, one of the world's largest independent futures brokers, is being named as the focus of a three-year investigation into market rigging by regulators at the London International Financial Futures and Options Exchange, Liffe. The inquiry is due to conclude in the next few weeks.

According to four sources at Liffe, the exchange's internal investigation department has now concluded its probe into the activities of a number of Refco futures traders. The sources allege the Refco traders systematically participated in what is known in the trade as "front-running''. This practice, banned by the exchange, involves a trader taking a large order from a client but using this information to deal for his own account first before he executes it. Since an order often pushes the market up, the trader can sell at a profit.

Described by one senior trader at Liffe as "the biggest mess the exchange has ever had", the affair is likely to complicate Liffe's efforts to reposition itself following the loss of the bulk of trading in German bund futures to Frankfurt's Eurex exchange. Indeed, suspicions that "front-running" was a problem at Liffe is one reason that Eurex won over London in the German bund futures market, say Liffe sources.

It has been suggested the exchange has been reluctant to conclude the Refco inquiry because it hopes to make it seem like ancient history once its open-outcry system finishes in the next four to five months.

Even if the exchange finds against Refco, the company has the right to appeal. This could prolong the affair. Neither Refco or Liffe would comment when contacted by The Independent on Sunday.

Liffe is currently in the process of switching to electronic screen trading in order to compete with Eurex and hang on to the bund contracts it still handles. Liffe's share of the lucrative bund futures market fell 80 per cent in just a year last year to 10 per cent of the total market.

The switch to electronic screens will spell the demise of the Cannon Street-based exchanges' open-outcry trading system. Dressed in jackets coloured to represent the securities firms they work for, Liffe traders are the City's most colourful characters, carrying out their business with cries and hand signals.

If the Refco traders are found guilty of misconduct, many Liffe traders fear it will be the junior guys who take most of the rap, even though they were acting under the orders of senior management. According to sources, one of the men being investigated was on holiday while options were traded on his behalf, without his knowledge or consent.

"We all knew the exchange only had a few years to go and people were doing what they were told for fear of being sacked," said a source.

Liffe can impose unlimited fines on both individual traders and companies it believes have broken the rules, and they can find themselves blacklisted from working in the City. Transactions are monitored by video screens and audio equipment.

"What it boils down to is how far the exchange will go to protect Refco and protect themselves," said one source.

The first person ever to be expelled from Liffe back in 1992 was a Refco employee, Giles Robinson, who was fined pounds 25,000 for breaking trading rules by engaging in front-running. At that time the Liffe market also fined Refco pounds 56,500, although the company claimed it knew knew nothing about the incident.