CFTC vs Esfand Boragosh: Proprietary trading is for the big boys.
In Commodity Futures Trading Commission v. Esfand Baragosh, 278 F.3d 319 (4th Cir. 2002), the Congress, in my opinion, sent professional foreign exchange traders a message: that a trader trading off exchange was expected to be sophisticated given the lack of protections usually afforded to those trading on an exchange.
I suspect that there are traders reading Congress’ reasoning above and taking offense. In this case, where the issue involved whether the Commodity Futures Trading Commission had jurisdiction over an individual allegedly in control of a firm selling futures off exchange, the court, in my opinion, weighed the inside information advantage of the defendant versus the information disadvantage of the parties that traded with the defendant’s firm.
A lack of transparency is a significant factor in fraud, fueling a counterparty’s ability to control a specific transaction. The rules of an exchange are designed to mitigate the imbalance of information (information asymmetries) between party and counterparty. An investor is not sophisticated because they a weighed down by bundles of cash. They are sophisticated because they are networked into well informed insiders and other sources of data.
Consumers of small, standardized, offered “as-is” products that are mass marketed to them are at a disadvantage. Self-regulated exchanges under government oversight can only provide so much protection.
Another lesson in why the trader must be diligent in understanding the market she trades in.
FX rates as of 2:13 pm 22 July 2022
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