CryptocurrencyInvestingBanksReal Estate

Former JPMorgan trader reveals how his mentor taught him to place and cancel bogus trades to manipulate markets

July 20, 2022, 11:09 AM UTC
Gregg Smith, former precious-metals trader for JPMorgan Chase, departs from federal court in Chicago on July 8, 2022.
Cheney Orr—Bloomberg/Getty Images

Gregg Smith clicked his computer mouse so rapidly to place and cancel bogus gold and silver orders for Bear Stearns Cos. and later JPMorgan Chase & Co. that his colleagues would joke that he needed to put ice on his fingers to cool them down afterward, or that he must be double-jointed.

That’s how his former protege, Christian Trunz, described for jurors how he watched Smith use so-called “spoof” trades — large orders intended to manipulate prices that were quickly canceled. Trunz, 37, said he learned how to spoof from Smith and others after joining Bear Stearns out of college in 2007, shortly before the bank was acquired by JPMorgan.  

To place and cancel the orders fast required a “rapid succession of clicking on a mouse,” and Smith, the desk’s top trader, was particularly good at it, Trunz told a federal jury in Chicago on Tuesday. That clicking was easy for everyone on the desk to hear, according to Trunz, who sat next to Smith for years and said he often pulled his chair alongside his mentor’s computer screen to watch him trade.

Trunz is the third former trader to testify at the fraud and racketeering trial of Smith and two senior employees at JPMorgan’s precious-metals desk: Managing Director Michael Nowak and hedge-fund salesman Jeffrey Ruffo. They’re accused of systematically cheating to help themselves and their top clients for years.

“This was an open strategy on the desk,” said Trunz, who has pleaded guilty to spoofing charges and is cooperating with prosecutors. “It wasn’t hidden.”

Speed was essential to successfully spoof, especially as a growing share of the precious-metals market was being dominated by firms using computer algorithms to buy and sell futures contracts in fractions of a second, according to Trunz.

“We fully believed this was a battle” between the bank and the so-called algos, Trunz said. “This was the first time when machines were interacting with humans on a trading platform. It was man versus machine.” 

The goal of spoofing was to trick the rival computers into buying or selling to benefit JPMorgan’s position, by using a large volume of bogus orders to create the false market impression, he said.

“Those trades were deceptive,” Trunz said of the thousands of spoof orders the desk placed over the years. “They were used to bring out a reaction from those algorithms to get what we needed done.”

Trunz, whose father worked at JPMorgan for decades and was a senior executive, was trading precious metals for the bank in New York, Singapore and London from 2007 to 2019, when he pleaded guilty. He said he idolized Smith, Nowak and Ruffo and sought to learn as much as he could from them so he could emulate their success. 

Trunz said he sat next to Smith for five years until 2013, and when he moved to London in 2014, worked closely with Nowak, who he got to know well. Ruffo was “the best salesman on the street,” with a long list of big clients, and was the primary reason JPMorgan had kept the Bear Stearns team intact after the acquisition, Trunz said.

Smith spoofed almost every day, Nowak did so about once a week, and Ruffo, while not a trader, would sit next to Smith and encourage him to spoof the market to execute client orders at the best possible prices, Trunz said. It wasn’t unusual to hear Ruffo urge Smith to “keep clicking, keep going,” with a spoof trade, Trunz said. 

“We all traded that way,” Trunz said. “We utilized that strategy on the desk to make money for ourselves and for our clients.”

Smith would sometimes spoof markets one way, then the other when filling orders for Ruffo’s top hedge fund clients to make sure they felt like they were getting a good price, Trunz said.

Prosecutors showed jurors internal chat logs between Ruffo and Moore Capital Management’s Christopher Pia from April 3, 2008, in which the hedge fund trader had directed Ruffo to sell 100,000 ounces of silver for him. Smith filled the order, then rapidly placed a large number of additional sell orders that he quickly canceled as the price of silver dropped.

Ruffo then congratulated Pia on his decision to sell. “Did well with that, lower already,” he said in a message. 

Asked to explain why Smith made the spoof trades, Trunz said, “Gregg looks like he was able to execute at a great level. Chris Pia looks like he made a great decision to sell 100,000 ounces when he did.” Trunz added, “Everybody has an ego.”

The case is US v. Smith et al, 19-cr-00669, US District Court, Northern District of Illinois (Chicago)

Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.