CFTC Fines Nasdaq Subsidiary $22 Million for Misleading Public and Regulators About Trader Incentive Program

The Commodity Futures Trading Commission (CFTC) has imposed a $22 million fine on a Nasdaq subsidiary for allegedly misleading the public, regulators, and its own compliance staff regarding the details of a trader incentive program. The penalty was announced by the CFTC in a press release on Thursday.

Nasdaq Futures, which allowed its CFTC registration as a designated contract market to lapse in 2020, is accused of not fully disclosing the details of an incentive program, making false and misleading statements about it, and failing to properly supervise the program, according to the CFTC.

The controversy centers around the Nasdaq Futures exchange (NFX), launched in 2015 to trade energy futures. One of the incentive programs in question was the Designated Market Maker (DMM) program, which was publicly described and disclosed to the CFTC as “an incentive program that would pay a fixed monthly stipend to market makers,” the CFTC order noted.

However, between 2015 and 2018, NFX made additional payments to a select number of DMM program participants based on the total volume of contracts they traded. This aspect of the incentive program was not disclosed to the public or the CFTC, the order revealed.

In late 2016, during a rule enforcement review conducted by the CFTC’s Division of Market Oversight, NFX staff, including members of its compliance and legal teams, were interviewed. The CFTC's order states that these employees repeatedly told investigators that NFX did not offer a volume-based component to the DMM program, seemingly unaware of its existence. The CFTC asserted that “NFX reasonably should have known such statements were false and misleading at the time NFX made those statements.”

However, not all members of the CFTC were in agreement with the enforcement action. CFTC Commissioner Caroline Pham voted against the settlement, arguing that some of the allegations against NFX lacked factual support and took issue with how the order characterized the actions of NFX’s legal and compliance professionals.

“This settlement continues the CFTC’s campaign against highly respected legal and compliance professionals by slapping on allegations of making false statements even when information was provided honestly to the best of their knowledge in good faith and without intent to defraud,” Pham stated. “The CFTC’s standard is apparently that everyone must know everything everywhere all at once.”

Pham’s dissent in the Nasdaq case followed a similar stance she took earlier in the week regarding the CFTC’s $48 million fine against Switzerland-based TOTSA TotalEnergies Trading, where she accused the agency of overreaching in its criticism of a compliance officer.

In response to the CFTC’s action, a Nasdaq spokesperson, in an emailed statement, noted that the company “sold NFX’s futures exchange business in November 2019 and is pleased to resolve this matter in cooperation with the CFTC.”