Court Opinion

ID: 767525
Source: CourtListenerOpinion
Date Created: 2012-04-18 08:36:12+00
Date Added: 2024-06-11T15:18:24.024737
License: Public Domain

202 F.3d 926 (7th Cir. 2000)
WAYNE I. ELLIOTT, FRANCIS MARITOTE,   J. BRIAN SCHAER and JONATHAN A. SION,    Petitioners,v.COMMODITY FUTURES TRADING COMMISSION,    Respondent.
No. 98-1305
In the  United States Court of Appeals  For the Seventh Circuit
Argued September 28, 1998Decided February 3, 2000

Appeal from an Order of the  Commodity Futures Trading Commission.  CFTC Docket No. 95-1.
Before CUDAHY, EASTERBROOK and RIPPLE, Circuit Judges.
CUDAHY, Circuit Judge.

1
The Division of  Enforcement (Division) of the Commodity Futures  Trading Commission (CFTC or Commission) need  present only circumstantial evidence--and only a  preponderance of it--to establish liability for  trade practice violations. See, e.g., Reddy v.  CFTC, 191 F.3d 109, 118 (2d Cir. 1999); In re  Buckwalter, [1990-1992 Transfer Binder] Comm.  Fut. L. Rep. (CCH) para. 24,995 at 37,684 (CFTC  Jan. 25, 1991). Like most trade practice  enforcement actions, this case involves a set of  undisputed facts and the competing inferences  that can be drawn from those facts. See, e.g., In  re Reddy, [1996-1998 Transfer Binder] Comm. Fut.  L. Rep. (CCH) para. 27,271 at 46,210 (CFTC Feb.  4, 1998). The Commission says the circumstances  here support an inference of non-competitive and  pre-arranged, and therefore illegal, trading.  Wayne Elliott, Francis Maritote, J. Brian Schaer  and Jonathan A. Sion (the petitioners) disagree,  as did an ALJ who heard the case in the first  instance. The CFTC reversed the ALJ, finding  against the petitioners, who now seek our review.  Because the Commission is presumptively better  able to weigh the relative strengths of the  competing inferences and because its conclusion  is reasonable, we affirm its order granting the  enforcement action.

I.

2
Bringing a common combination of charges,1  the Division alleged, in essence, that the  petitioners had executed 32 non-competitive, non-  bona fide trades. Pursuant to 17 C.F.R. sec.  10.66(d), the Division's investigator, Hugh  Rooney, presented his direct testimony in the  form of a written report filed before the  hearing. Rooney's testimony consisted of two  parts. First, he described what happened. The  petitioners did not contest this description, and  we summarize this factual testimony immediately  below. Second, Rooney offered expert opinion  testimony about the inferences to be drawn from  these facts. The petitioners bitterly opposed  Rooney's analysis and conclusion. We discuss the  issues raised by this testimony later. See Part  III, infra.

3
Rooney provided an undisputed factual  introduction to the petitioners, the futures market and the charged trades. He told the  following story. In 1991, the petitioners were  members of, and registered floor traders at, the  Chicago Board of Trade (CBOT). Each was an  experienced, high-volume trader in wheat futures  (among other commodities) for his own account (a  "local" trader). Elliott had traded wheat futures  for almost 20 years. Maritote had 15 years  experience. Schaer and Sion were newer to the  pits, but still active, high-volume traders.

4
Rooney also explained that wheat contracts are  delivered in March, May, July and September.  Trading during these delivery months is  considerably more risky than during non-delivery  months. Contract delivery on the CBOT is on a  "first-in-first-out" basis: those traders with  the oldest contracts are at the front of the  delivery line; those with newer contracts are at  the back. Traders can reposition themselves in  the delivery line (a practice called  "freshening") by liquidating old open positions  in the nearby delivery month and buying  equivalent volume contracts for future delivery  (called the deferred month).2 As a trader's  delivery date nears, the price differential  between the contracts on the deferred month and  those on the nearby month narrows. The longer a  trader waits to freshen his position, the greater  the potential profit. If he fails to successfully  freshen, however, he risks arrival at the front  of the line where he will be forced to accept  delivery and pay the carrying charges for storing  and insuring the grain. Because of these risks,  only some of the 75 to 100 wheat futures traders  remain active during the wheat delivery months.  Each of the four petitioners was a member of this  relatively elite crew.

5
At the end of February 1991, each of the  petitioners was close to the front of the  delivery line for March wheat contracts. Each  also held positions in May and July wheat  contracts. Over eight trading days immediately  prior to and during the March delivery cycle, the  petitioners, trading among themselves, sold and  repurchased the same spreads in identical  quantities at the same price differential in a  series of 32 trades.3 None of the petitioners  suffered a loss or realized a profit from these  trades; their net positions did not change.  Summary descriptions of the trades follow:

6
1.  February 25.  Elliott sold 1000 March-July  spreads at 21 cents to Maritote. Elliott bought  1000 of the same spread at the same price--450  from Maritote and 550 from Sion. Sion got his 550  from Maritote, also at 21 cents. Schaer was not  involved.

7
2.  February 26.  Elliott sold 735 March-May  spreads at 10.75 cents to Maritote. Elliott  bought 735 of the same spread at the same price  from Sion. Maritote sold 735 of the same spread  at the same price to Sion. Schaer was not  involved.

8
3. February 27.  Trading only March-May spreads  at 11.5 cents, Elliott bought 1500 from Maritote,  sold 2500 to Sion and then bought another 1000  from Maritote. Maritote bought 2500 of thesame  spread at the same price from Sion. Schaer was  not involved.

9
4.  March 4.  Elliott bought 1000 March-May  spreads at 9.5 cents from Sion, then, turned  around and sold them to Maritote. In two separate  trades, each of 500, Maritote sold 1000 of the  same spread at the same price to Schaer. Schaer  sold them to Sion.

10
5.  March 6.  Elliott bought 2500 March-May  spreads at 10.75 cents from Sion and sold them to  Schaer. Schaer sold the same quantity of the same  spread at the same price to Sion. Maritote was  not involved.

11
6.  March 7.  Elliott sold 2500 March-May spreads  at 10 cents to Schaer and bought the same  quantity of the same spread at the same price  from Sion. Sion bought 2500 from Schaer. Maritote  was not involved.

12
7.  March 8.  Maritote bought 500 March-May  spreads at 9.5 cents from Sion and sold them to  Schaer at the same price. Elliott bought 2000  March-May spreads at 9.5 cents from Sion and sold  them to Schaer. Schaer sold all 2500, in two  trades, to Sion.

13
8.  March 13.  Elliott bought 1800 March-May  spreads at 8.75 cents from Schaer and sold them  to Sion. Sion sold 2600 of the same spread at the  same price to Schaer and then bought 800 back.  Maritote was not involved.

14
This was the Division's substantive case against  the petitioners--the undisputed facts surrounding  the trades. The Division presented no direct  evidence that the petitioners had pre-arranged or  non-competitively executed any of the trades. The  evidence was entirely circumstantial.

15
Rooney concluded from this series of facts--the  mere circumstances--that the petitioners "engaged  in a trading scheme to freshen their March 1991  wheat futures positions to avoid, decrease and/or  delay delivery of cash wheat. Furthermore, this  was accomplished through noncompetitive trading  and wash sales." R. 53, at 310. Rooney relied on  seven "significant characteristics" of the  challenged trades to support this conclusion. Id.  at 272.

16
1.  Size.  Rooney opined that all but one of the  charged trades were large trades (over 500,000  bushels) and that the petitioners accounted for  an abnormal percentage of the total trade volume.  See id. at 310-11.

17
2. No gains or losses.  Rooney found it "very  unusual" and "remarkable" that none of the  petitioners made a profit or suffered a loss in  any of the 32 trades over the eight days: "the  lack of any profit or loss on any of the trades  suggest that the trades were noncompetitive and  wash sales." Id. at 311.

18
3. No other traders involved.  Rooney thought  that it was "unusual" that no other traders  participated in any of the 32 trades. Id. at 312-  14. On the February and March 4 trading days,  there were between 25 and 41 traders trading  March 1991 spreads. On March 6, only eight  traders swapped March 1991 spreads. Thirteen got  into the action on March 7, but only seven  participated on March 8 and 13. See id. at 313.  Despite the limited trading population, Rooney  concluded that the "absence of any participation  by other traders or public customers suggests  that no other traders had any genuine opportunity  to participate in any other trades. In other  words, the [petitioners] deliberately excluded  other market participants and therefore their  trades were noncompetitive." Id. at 314.

19
4.  Trade configurations.  Rooney concluded that  the circular trading pattern--between three or  four of the petitioners--was indicative of non-  competitive trading and constituted an effort by  the petitioners to avoid any market risk. See id.  "In general, competitive trading will rarely, if  ever, result in a trade configuration with such  overall precision and symmetry. It is virtually  impossible for these configurations to occur in  a competitive market. Competitive trading is  characterizedby a certain randomness. . . .  [S]ince price should be the only reason to prefer  one trader over another trader, competitive  trading is usually dispersed among numerous  traders and brokers. The consistent repetition of  the same trading partners indicates a lack of  genuine price competition and prearrangement."  Id. at 315.

20
5 and 6.  Audit trail irregularities.  The fifth  and sixth significant factors both relate to the  reporting and recording of the trades. Rooney  concluded that trading irregularities and audit  trail deficiencies such as out-of-sequence trades  and late trading cards, although not unusual in  volatile markets, suggested non-competitive  trading in this case because none of the trades  involved third parties (brokers or customers or  dual traders) and none involved price  fluctuations. See id. at 317-19. The petitioners  also recorded the trades in unusual fashions,  using single cards or consecutive lines. See id.  at 319-20.

21
7.  Trader motivation.  Rooney noted a similarity  of motivation: all of the trades appear to have  been executed to allow the traders to freshen  their positions and avoid delivery. See id. at  320-21. He did not think that this factor was  particularly significant: "I do not believe it is  essential to isolate a motivation, as I have  here, in order to conclude that the trades were  noncompetitive and wash sales." Id. at 321.

22
The petitioners did not contest Rooney's factual  account; they admitted making the charged trades  in order to freshen their positions. But they  also asserted--each petitioner testified at the  hearing--that all of the trades were completed  competitively by open outcry in the pit and  denied that any of the trades were pre-arranged.  Character witnesses testified on behalf of each  petitioner, vouching for his reputation for  honesty. The petitioners did, however, challenge  Rooney's conclusion that the circumstances gave  rise to an inference of non-competitiveness or  pre-arrangement strong enough to establish  liability.

23
Before the hearing--recall that Rooney's direct  testimony was presented in written form and filed  in advance of the hearing--the petitioners argued  that Rooney's opinion lacked foundation and was  unreliable and therefore should be excluded under  Fed. R. Evid. 703. See R. 75. The ALJ, repeating the  Division's response to this motion, see R. 77,  rejected this argument on the ground that the  petitioners could cross-examine Rooney about the  foundation for his conclusion at the hearing and  thereby test its reliability there. Thus, it  denied the motion. See R. 79.

24
So, at the hearing, the attorneys for each of  the petitioners took turns probing for weaknesses  in the bases of Rooney's ultimate conclusion.  They poked many holes in his opinion and  extracted some significant concessions. Under  cross-examination, Rooney acknowledged that his  report was based on limited information. He  admitted, for example, that he did not interview  any other wheat traders to determine whether the  trades had been conducted by open outcry, see R.  124, at 186-87, and that he had not conducted any  historical analysis to determine whether lack of  profit was an unusual occurrence during delivery  months (despite, in his second significant  characteristic, concluding that the lack of  profit was unusual enough to warrant an inference  of liability), see id. at 175. Rooney also  admitted that it was impossible to know how many  traders were in the wheat futures pit attempting  to trade, as opposed to actually trading, during  the relevant time periods (a concession which  might undermine his reliance on the first, third  and fourth significant characteristics). See id.  at 97-98. More, he acknowledged that he had used  the eight charged trading days as his entire  sample for purposes of his analysis of delivery  period trading (another admission which might  negate reliance on the first four  characteristics), see id. at 152-54, and conceded  that, in his opinion, it would be impossible to  quantify the likelihood of the observed audit  trail irregularities (casting doubt on his  reliance on characteristics numbers five and  six), see id. at 189. These and other Rooney  concessions amounted to an admission that his  conclusion was not based on a rigorous  statistical analysis. In fact, it was impossible  for the petitioners to cross-examine Rooney about  the factual and statistical bases for many of his  conclusions because the conclusions were based on  computerized CBOT records which Rooney had  studied online but had not reduced to hard copies  and had not produced for the petitioners. See id.  at 72-75.4 The Division apparently managed to  produce portions of some of these documents  during a break in Rooney's cross-examination, see  id. at 80-82, but the petitioners were never  given all of the relevant  background  information.5

25
The ALJ dismissed all three charges. Relying on  the petitioners' testimony as well as the  testimony of two other traders, the ALJ  determined that all of the trades had been  conducted by open outcry and that market  conditions, rather than pre-arrangement, had  limited participation during the risky delivery  cycle. He was unpersuaded by Rooney's seven  significant characteristics, concluding that the  trading patterns amounted to only insubstantial  circumstantial evidence.

26
The Division appealed to the full Commission,  which reversed the ALJ's dismissal of the  charges. The Commission discounted the traders'  testimony that the trades had been executed by  open outcry and focused instead on the "precision  and symmetry" of the trading configurations. It  concluded that this pattern evidence belied the  randomness normally associated with competitive  trading and therefore granted enforcement.6

II.

27
The petitioners frame the question on appeal as  one of sufficiency of the evidence--whether the  circumstantial evidence was enough to establish  liability. See Petitioners' Br. at 16. As we  noted at the start, circumstantial evidence can  suffice to meet the Division's burden. See, e.g,  In re Buckwalter, [1990-1992 Transfer Binder]  Comm. Fut. L. Rep. (CCH) at 37,684. "[H]owever,  the Division must do more than present suspicious  circumstances suggesting the possibility of  knowing wrongdoing. It must establish that the  existence of these factual elements is more  probable than their nonexistence." In re Rousso,  [1996-1998 Transfer Binder] Comm. Fut. L. Rep.  (CCH) para. 27,133 at 45,308 (CFTC Aug. 20, 1997)  (internal quotations and citations omitted); see  also In re Abrams, [1994-1996 Transfer Binder]  Comm. Fut. L. Rep. (CCH) para. 26,479 at 43,136  (CFTC July 31, 1995) ("If both innocent and  culpable inferences are equally supported by the  record, the Division fails in its burden of  proof."). Evidence of unusual trading patterns, like that presentedhere, commonly gives rise to  an inference of culpability. See, e.g., In re  Reddy, [1996-1998 Transfer Binder] Comm. Fut. L.  Rep. (CCH) at 46,210; In re Rousso, para. 27,133  at 45,308 ("a pattern marked by characteristics  unlikely to occur in an open and competitive  market was indicative of noncompetitive trading")  (citations omitted); In re Bear Stearns & Co.,  [1990-1992 Transfer Binder] Comm. Fut. L. Rep.  (CCH) para. 24,994 at 37,663-64 (CFTC Jan. 25,  1991).

28
Two standards of review can apply to appeals  from the Commission. If the question presented is  "of the sort that courts commonly encounter, de  novo review is proper." Ryan v. CFTC, 145 F.3d 910, 916 (7th Cir. 1998) (citations and internal  quotations omitted). On the other hand, if the  Commission's decision was peculiarly within its  area of expertise, we apply a deferential  standard and will affirm so long as the decision  is reasonable. See Cox v. CFTC, 138 F.3d 268,  271-72 (7th Cir. 1998); LaCrosse v. CFTC, 137 F.3d 925, 929 (7th Cir. 1998). Determining which  standard to apply is no easy matter, however,  because "if the question involves an  interpretation within the specialized knowledge  of the agency, a court should not automatically  abandon heightened review." Maloley v. R.J.  O'Brien & Assoc., Inc., 819 F.2d 1435, 1441 (8th  Cir. 1987). "When the agency diet is food for the  courts on a regular basis, there is little reason  for judges to subordinate their own competence to  administrative 'expertness.'" Hi-Craft Clothing  Co. v. NLRB, 660 F.2d 910, 915 (3rd Cir. 1981).  Thus, courts have exercised plenary review over  common law issues, see, e.g., Morris v. CFTC, 980 F.2d 1289, 1294 (9th Cir. 1992) (reviewing de  novo a waiver of "pivotal issue" in a fraudulent  inducement claim), constitutional issues, see,  e.g., LaCrosse, 137 F.3d at 929-32 (reviewing de  novo a double jeopardy issue), and issues within  an agency's special expertise but which are also  a regular part of the court's jurisprudential  diet, see, e.g., Maloley, 819 F.2d at 1440-42  (reviewing de novo the Commission's determination  that the respondent had failed to exercise  "reasonable diligence" in discovering the fraud  because the court had often considered what  evidence supported a finding of "reasonable  diligence"). On the other hand, courts have  applied the deferential standard to Commission  determinations of the evidence necessary to prove  violations of various sections of the Commodity  Exchange Act (the Act), see, e.g., Monieson v.  CFTC, 996 F.2d 852, 859-61 (7th Cir. 1993) (sec.  13(b)); Morris, 980 F.2d at 1295-96 (sec. 4(b));  Silverman v. CFTC, 549 F.2d 28, 29-33 (7th Cir.  1977) (sec. 4(b)), as well as Commission rules,  see, e.g., Monieson, 996 F.2d at 861-62 (CFTC  Rule 166.3).

29
We believe the deferential standard applies  here. Deciding whether a particular set of  circumstances supports an inference of non-  competitive trading on the futures markets is an  issue peculiarly within the Commission's area of  expertise. See Ryan, 145 F.3d at 923 ("[N]either  a criminal jury nor the Seventh Circuit, however  authoritative their declarations, can claim  expertise in the conduct of trading at the CBOT  . . . . [T]he Commission [is] certainly an expert  in matters relating to trading . . . .") (Cudahy,  J., concurring). While this court often faces  sufficiency issues, the particular and peculiar  nuances of the issue in this situation--  involving, as it does, the enforcement of CFTC  trade practice rules, see, e.g., Monieson, 996 F.2d at 859-62--are not "food for the court on a  regular basis." Hi-Craft, 660 F.2d at 915. We  have found no published opinions in which a  federal court has considered whether a particular  set of futures market trading facts gives rise to  an inference of pre-arrangement or non-  competitive trading. The Commission, on the other  hand, regularly considers the question and has  already drawn a line, even if difficult to  define, between evidence that establishes  culpability and that which does not. See  discussion supra at 931-32. We are not inclined to  second-guess the Commission on this issue, nor do  we relish redrawing the line ourselves. In short,  the Commission is uniquely well positionedto  make these sorts of fact-specific, inference-  laden determinations.7

30
In this case, the Commission's decision passes  muster. After noting that, "as the Commission has  repeatedly found, direct evidence of  noncompetitive trading is rarely available, and  [that] the circumstantial analysis of trading  patterns is an appropriate starting point for  proving noncompetitive trading," R. 175, at 13,  the Commission analyzed the common  characteristics of the charged trades. The series  of trades, it found, reflected "a precision and  symmetry not generally found in competitively  executed trades." Id. at 14. The interrelated  trading pattern was also critical, and the  Commission highlighted the fact that some of the  trades were against the economic interest of the  petitioners: "If a single participant in the  ring-like transaction failed to play his part,  none of the participants would succeed. In these  circumstances, it is unlikely that a trader would  repeatedly act against his own economic interest  without advance knowledge that the other  participatants would continue trading the spread,  enabling him to offset his newly-acquired long  position." Id. at 15. In the Commission's view,  an open and competitive market simply could not  have "so precisely accommodate[d] the financial  and timing goals of the four [participants]  acting independently of each other." Id. at 18.  Therefore, "[b]ased on the totality of  circumstantial evidence in the record, it is  unlikely that petitioners would have known one  another's precise needs without some meeting of  the minds or could have achieved this kind of  trading symmetry in a volatile market by  competitive execution." Id. at 21.

31
Thus, the Commission was satisfied that the  trading pattern--spreads in exactly identical  quantities at the same price--was more likely  than not the result of pre-arrangement and non-  competitive trading. It carefully considered all  of the evidence, articulating its reasons for  discounting some and accepting some. In the end,  the Commission determined that the Division had  presented sufficient facts to give rise to an  inference of culpability, and we defer to this  considered, supported and reasonable decision.

III.

32
The issue of Rooney's opinion testimony remains.  The fight over the admissibility of this  testimony did not reach this court. Despite the  pre-hearing motion, the aggressive cross-  examination and the competing expert testimony,  the petitioners made no objection to the  admission of Rooney's report at the hearing, did  not argue admissibility in their post-hearing  briefs and did not raise the admissibility issue  with the Commission during the Division's appeal.  Thus, the admissibility of Rooney's testimony  does not appear to be inescapably before this  Court. Indeed, we doubt that the petitioners have  properly preserved the issue for appeal.

33
Had the petitioners sustained their attack and  properly challenged the ALJ's decision to admit  Rooney's opinion testimony, we might have been  inclined to agree with them. Daubert v. Merrell  Dow Pharm., Inc., 509 U.S. 579, 589 (1993), held  that reliability is the touchstone for expert  testimony based on "scientific, technical, or  other specialized knowledge" (quoting Fed. R. Evid.  702). In order to "ensure that any and all  scientific testimony or evidence admitted is not  only relevant, but reliable," the factfinder must  act as gatekeeper. Id. "Proposed [scientific]  testimony must [therefore] be supported by  appropriate validation--i.e., 'good grounds,'  based on what is known." Id. at 590. Kumho Tire  Co., Ltd. v. Carmichael, 526 U.S. 137, 119 S. Ct. 1167 (1999), extended this gatekeeping function  to all expert testimony. The petitioners'effective cross-examination of Rooney exposed his  opinion--and therefore his ultimate conclusion--  as unreliable. The Division, through Rooney,  presented what was essentially a "numbers" case:  the circumstances surrounding the charged trades,  it alleged, were statistically improbable. But it  provided no reliable statistics to support this  charge (and, indeed, could not even produce for  the petitioners some of the raw numbers upon  which it allegedly relied). It conducted no  analysis of the liquidity of the market or of the  usual number of traders swapping spreads during  wheat delivery cycles; no analysis of the  likelihood that delivery cycle freshening trades  would result in no profit for the traders; and no  analysis of the likelihood of making mistakes on  trading cards or other audit trail  irregularities--that is, it failed to justify  Rooney's assertion that the "significant  characteristics" were at all significant. It was  a numbers case without meaningful numbers, and,  had the respondents objected to the admission of  Rooney's opinion testimony, we think that Kumho  might well have compelled the ALJ to sustain the  objection.8

34
Note, however, that we say only that we might  have been inclined to agree with a properly  preserved challenge to the admission of Rooney's  expert testimony. Our analysis is qualified  because it is not plain that Rooney's opinion  testimony played any role in either the ALJ's or  the Commission's disposition of this matter.  Recall that the ALJ was unpersuaded by the seven  "significant characteristics" upon which Rooney  relied, see R. 153, at 7-11:

35
Taken as a whole, these characteristics do not  prove that the challenged transactions were the  result of an implied or express agreement to  prearrange trades. The trade characteristics  cited by the Division reflect a natural outcome  of trades that can occur in a constricted market  among perceptive and intelligent large volume  traders who want to secure a later delivery date.

36
Id. at 11. On the other hand, the ALJ did state  that, "[o]n balance, [Rooney] provided an  accurate factual description of the . . .  transactions and of the [CBOT] delivery process."  Id. at 7 n.9 (emphasis added). The Commission  also appears to have drawn a distinction between  Rooney's factual testimony and his opinion  testimony. It mentioned Rooney's opinion  testimony only once, see R. 175, at 14, and, in  that singular instance, not as support for its  conclusion. Instead, the Commission simply drew  its own inferences from the undisputed accounts  of the trades, focusing on the trading symmetries  which it thought were indicative of non-  competitive and pre-arranged trading. See id. at  12-23. The patterns, not Rooney's opinion, swayed  the Commission.

37
It appears then that both factfinders9  discounted Rooney's unreliable opinion testimony.  This is an appropriate approach. Daubert and  Kumho were decided in the context of  admissibility, but the principle for which they  stand--that all expert testimony must be  reliable--should apply with equal force to the  weight a factfinder accords expert testimony. See  Libas v. United States, 193 F.3d 1361 (Fed. Cir.  1999). Thus, a factfinder should employ the  reliability benchmark in situations, as here, in  which unreliable expert testimony somehow makes  it in front of the factfinder, and assign the  unreliable testimony little if any weight. Both  the ALJ and the Commission appear to have  complied with this principle, ignored Rooney's  unreliable opinion and drawn their own inferences  from the undisputed facts. We therefore decline  to rule on the admission of the opinion testimony in the first instance; if error, it appears to  have been harmless.

IV.

38
We recognize the seeming illogic of rejecting  (to the extent we do) Rooney's inference on the  one hand, see Part III, supra, while endorsing  (also to the extent we do) the Commission's on  the other, see Part II, supra. Both of their  conclusions were, after all, based on the same  set of undisputed facts. From our perspective,  however, there is a cognizable difference. The  condemnation of the admission of Rooney's opinion  testimony would amount to an application of an  evidentiary rule and recent interpretations of  it. We would simply be telling a factfinder what  evidence it may properly consider, something we  regularly do. The Commission's decision, on the  other hand, reaches us in a different posture:  the question is not whether one piece of evidence  is sufficiently reliable to be considered in the  first place, but rather whether a certain quantum  of specialized evidence was sufficient to raise  a strong enough inference to establish liability  for a violation of various provisions and rules,  the enforcement of which was entrusted by  Congress to a specialized agency. For precisely  this reason, as we have already said, we choose  not to second-guess the Commission's inferential  conclusion. So, while we might prefer to see a  more statistically rigorous investigation of this  issue, the Commission's analysis of the  circumstantial evidence was adequate.

V.

39
If our dissenting colleague were a member of  the CFTC, his opinion, offered as the opinion of  the agency, might well survive judicial review as  reasonable and as supported by substantial  evidence. The issue before us, however, is not  whether the CFTC here might have applied a  different analysis and reached a different  result; the issue is whether the analysis the  agency did apply and the result it did reach have  a rational basis and are supported by substantial  evidence. 5 U.S.C. sec. 706. Wisdom strongly  counsels and the Administrative Procedure Act  demands appropriate deference to the Commission,  an independent regulatory agency charged with the  difficult task, among others, of detecting pre-  arranged trading on its regulated exchanges.  Direct evidence of pre-arrangement is rarely  available and regulatory authorities are forced  either to rely on circumstantial evidence or to  abandon their statutory responsibilities. See,  e.g., Reddy v. CFTC, 191 F.3d 109, 118 (2d Cir.  1999). The effect of requiring the elaborate sort  of critique proposed by the dissent is, as a  practical matter, to abandon any effort to detect  pre-arrangement.

40
We defer to the Commission in part because of  its "expertise" or perhaps more precisely, as the  dissent would have it, its specialized knowledge.  The expertise or specialized knowledge of the  agency is institutional, not personal. The  dissent is off-base in exploring the occupational  backgrounds of members of the Commission. As the  dissent illustrates, it is a tempting but  ultimately unrewarding exercise to make this a  contest between the expertise of the  commissioners and the expertise of the judges.  The agency employs experts in the various  subjects with which it must grapple and some of  its staff advise the commissioners. Courts, on  the other hand, employ no experts to advise the  judges although it has been suggested from time  to time that judges too should have expert  advisors. But in the interest of fairness, courts  generally eschew the idea of kept experts  whispering in the judges' ears. And to try to run  agencies like courts is what Alfred Kahn deplores  as the "overjudicialization" of the regulatory  process. 2 Alfred E. Kahn, The Economics of Regulation 87  (1971) (quoting Harry M. Trebing, A Critique of  the Planning Function in Regulation, Pub. Util.  Fortnightly (March 16, 1967)).

41
This distinction between agencies and courts is  one reason we reject our colleague's suggestion  that we follow antitrust precedent in this case.  The dissentargues that the petitioners' trading  patterns suggest "oligopolistic interdependence,"  a dynamic often found in antitrust cases in which  "repeat interactions lead small numbers of  players to act as if they had agreed. . . ."  Dissent at 35. This Court has refused to punish  oligopolistic interdependence without some  evidence of agreement, and the dissent urges us  to follow suit here. See JTC Petroleum Co. v.  Piasa Motor Fuels, Inc., 190 F.3d 775 (7th Cir.  1999).

42
But the courts are responsible, in treble  damage actions and otherwise, to resolve private  and public antitrust disputes in the larger  economy; the CFTC has a different task. It must  detect pre-arrangement in a much smaller and more  intimate sphere. These are, in some respects,  similar responsibilities, but that does not mean  that the doctrines that bind the courts in  antitrust matters can be transposed unmodified to  guide the regulation of commodity exchanges. At  least on the surface, relations among traders on  the exchange floor are quite different than  relations among large business corporations  selling in the same market. Traders rub elbows  constantly and may have lunch together often.  Theirs is the intimacy of the poker game as  opposed to the remoteness of rival armies in the  field. It does not strike us that, on the  question whether parallel action shows agreement,  the doctrine of the courts in antitrust cases  should bind the surveillance activities of the  Commission. We think that the Commission is free  to draw its own conclusions, as long as they are  reasonable under all the circumstances. And it is  free, the dissent's policy criticisms  notwithstanding, to punish even pre-arrangement  that hurts no customers. See Dissent at 32. That  is a policy choice, and we don't think it is any  of our business.

43
In addition to setting policy within specialized  mandates, agencies must decide what resources  they can afford to commit to one or another of  the many determinations they have to make and  must take some things as a given. This is one  reason we are not moved, beyond the concerns  noted earlier, by our colleague's complaints  about evidentiary weaknesses in this case. For  instance, the dissent complains that the record  contains no evidence of "usual" trading patterns  during the delivery months, without which the  Commission could not conclude that the trades in  question here were unusual. Our colleague  apparently requires as a remedy "statistical  analysis" or "empirical inquiry." Dissent at 31.  But this is putting a burden on the Commission  that exceeds what is routinely accepted in other  areas of decisionmaking. Witnesses are often  (perhaps even usually) allowed to testify in  comparative terms without establishing a  baseline. As an oversimplified example, a police  officer can testify that he was suspicious of a  driver because he thought it unusual that a car  was driving slowly and not using turn signals.  The officer would be allowed to draw inferences  from these facts without presenting evidence that  cars usually drive faster on that particular  street (much less evidence of the normal speed at  which they drive). The factfinder could rely on  its own experience to conclude that this sort of  behavior was out of the ordinary. In the case  before us, of course, the facts are more  specialized, and so is the factfinder. We only  ask whether the decision was non-arbitrary. Based  on other like decisions, we conclude that it was.

44
In any event, the record is not wholly silent  on the trading baseline for these delivery  months. The CFTC did attempt a comparative  analysis. The Commission reviewed respondent  Schaer's freshening activities on a day when he  was not charged with unlawful trading in order to  glean characteristics of "normal" trading. The  agency noted that Schaer had freshened about a  million bushels of wheat through ten "round-turn  trades" opposite ten other traders over several  of the 15-minute time brackets into which the  CBOT divides the trading day (ALJ Dec. at 9  n.13), all at slightly different prices. R.175,  at 7. Against this backdrop, the agency thenreviewed petitioner Elliott's charged trades on  the same day, during which he freshened 2.5  million bushels. Elliott sold the entire 2.5  million bushels to a co-petitioner, who sold the  entire amount to a second co-petitioner, who then  re-sold the amount to Elliott in two trades. Id.  at 7. These transactions took place over three  consecutive trade brackets--45 minutes--with no  profit or loss for any participating trader. Id.  The Commission concluded that the first incident  of "innocent" freshening "differed markedly from  the characteristics of the challenged trading."  Id. at 7, 14. So the Commission has invoked a  baseline quite understandable even to inexpert  judges. Our point is not that this baseline is an  exemplar, but that the CFTC did not totally  neglect a contextual analysis of the market as  the dissent suggests.

45
Similarly, the Commission properly relied on the  irregular audit trail to support a finding of  pre-arrangement. The dissent says irregular  trading cards prove nothing because traders  frequently alter them to correct mistakes made  during "fast-breaking events." Dissent at 29. But  the Commission did not draw the inference of pre-  arrangement from the correction of mistakes made  in the hurly-burly of trading, as the dissent  suggests. Instead, the Commission was swayed  because the traders recorded many of the  purportedly random transactions on consecutive  lines of the same card, which is consistent with  the inference that the trades were pre-arranged.  R. 175, at 6.

46
In the same vein, the dissent derides the  Commission's reliance on steady price action  during the delivery months as evidence of pre-  arrangement. Our dissenting colleague is, of  course, loyal to the efficient market hypothesis,  and insists that the non-volatility of prices can  mean only an absence of new information about  supply and demand. But if prices are set by pre-  arrangement, would the efficient market  hypothesis apply? And, in any event, is that  hypothesis holy writ binding on the CFTC in these  circumstances? Cf. Tennessee Gas Pipeline Co. v.  FERC, 926 F.2d 1206 (D.C. Cir. 1991) (Williams,  J.) "If the [Federal Energy Regulatory]  Commission proposes to reject . . . the Efficient  Market Hypothesis . . . , we . . . assume that it  is free to do so." Id. at 1211.

47
One additional point on the sufficiency of the  evidence. The Commission was particularly  impressed that the opening trades on most of the  charged days were against the economic self-  interest of the trader--he bought the spread  when, to freshen, he would have wanted to sell.  And the other traders passed up the opportunity  to turn a quick profit at the opening trader's  expense. The dissent says this seemingly  irrational behavior can easily be explained by  modern game theory. See Dissent at 34-35. The  traders were "repeat players," who predictably  forfeited a one-time profit in order to remain  viable players in the pit. The logic of this  argument is fine, but it fails for a number of  reasons. First, it was not argued on appeal and  would therefore be an improper basis on which to  reverse the Commission. Second, the Commodity  Exchange Act did not enact Dean Douglas Baird's  Game Theory and the Law. See Lochner v. New York,  198 U.S. 45, 75. (Holmes, J., dissenting). Third,  if the traders' strategic considerations were so  obvious, we might be safe in believing that the  Commission considered and rejected this  explanation. Fourth, none of the traders (or  other witnesses) testified that they passed up a  quick profit in order to stay in good graces in  the wheat pit. This last point is quite salient  since, if offered, direct evidence of trading  strategy would seem more probative than  probabilities ascribed to game theory.

48
Our dissenting colleague also wonders how the  CFTC could overturn the ALJ's credibility  determination without a good reason. See Dissent  at 28. But there was a good reason. The ALJ  identified two crucial factors purportedly  supporting his finding of no pre-arrangement:  first, the traders said they acted on publiclyavailable information, and, second, they said  that they had no choice but to trade among  themselves because no one else was interested in  participating. The CFTC found that the evidence  contradicted both of these factors. The  publications on which the traders supposedly  relied, the "CBOT Deliveries Last Trade Date  Assigned Reports" and the "Issue and Stop  Listing," were "unavailable on at least some of  the trading days at issue and on other relevant  days contained only partial data." R. 175, at 10.  And on some of the charged days early in the  delivery cycle, a substantial number of traders  did participate. The CFTC explained its decision  to disregard the ALJ as follows: "[w]here as  here, the ALJ's credibility findings are strongly  contradicted by other compelling evidence, and  the issue to be decided involves derivative  inferences rather than testimonial inferences,  the Commission will review de novo the inferences  to be drawn from the record. See N.L.R.B. v.  Stor-Rite Metal Products, Inc., 856 F.2d 957, 964  (7th Cir. 1988)." R. 175, at 21.

49
The dissent takes the CFTC to task for ignoring  Stoller, and chastises us for creating a conflict  with it. This is puzzling, particularly because  that case is not even cited in the petitioners'  main brief. Be that as it may, in Stoller, the  CFTC, without any evidentiary hearing sanctioned  a trader for making "wash sales" with intent to  avoid a bona fide market transaction. 834 F.2d at  264. The Second Circuit held that, since the  facts had never been found, the trader was  entitled to a hearing to establish that he did  not collude with others to wholly avoid market  risk. See id. at 265. The court further held that  without notice to the public through rulemaking,  the Commission could not sanction as "wash sales"  freshening operations that sought to minimize  market risk but were not pre-arranged to wholly  negate it. See id. at 267. The Second Circuit  explained that the historical definition of "wash  sales" concerned "transactions that were  virtually risk-free, often prearranged, and  intentionally designed to mislead." Id. at 266.  In the present case, the Commission is  sanctioning these traders after finding as a fact  after hearing that their conduct fits this  historical definition; there therefore is no need  for notice to the public or a new rule  proclaiming a broader concept of "wash sales."  The issue here, unlike Stoller, is whether  substantial evidence supports the Commission's  findings. There is no conflict with Stoller.

50
Finally, our colleague accuses us of a Chenery  violation in "filling gaps" not addressed by the  Commission. See Dissent at 36, citing SEC v.  Chenery Corp., 318 U.S. 80, 88 (1943).  Admittedly, the CFTC did not digress into such  matters as game theory, antitrust dynamics or  Stoller. Nor did we address or analyze these  factors in earlier sections of this opinion. The  present section merely responds to the arguments  of the dissent. Since the dissent does not  necessarily adhere to the main lines of the  Commission opinion, this responsive section by  way of rebuttal must dwell on some matters not  found in the Commission opinion. Therefore, the  decision of the Commission is

51
AFFIRMED.

1
 The Division charged the respondents with (1)  engaging in noncompetitive trading in violation  of sec. 1.38(a) of the Commission Regulations;  (2) engaging in wash sales in violation of  sec.sec. 4c(a)(A) and (B) of the Commodity  Exchange Act, 7 U.S.C. sec. 1 et seq.; and (3)  posting non-bona fide prices in violation of sec.  4c(a)(B) of the Act.

2
 Freshening is a legitimate trading strategy. See,  e.g., In re Collins, [1986-1987 Transfer Binder]  Comm. Fut. L. Rep. (CCH) para. 22,982 at 31,903  n.25 (CFTC Apr. 4, 1986), rev'd on other grounds,  Stoller v. CFTC, 834 F.2d 262 (2d Cir. 1987); see  also R. 53 at 309 (Rooney stating that "[t]he  freshening of open futures positions is a  legitimate means to decrease or delay the  physical delivery of a cash commodity"). "Indeed,  the practice of freshening a position can be  viewed as a salutary one since it helps to assure  that longs desiring delivery will be high on the  final lists of eligible assignees of delivery  notices." Johnson & Hazen, Commodities Regulation sec.  2.05[5] at 2-58.

3
 A spread is the simultaneous purchase of a  commodity for delivery in one month and the  corresponding sale of the same commodity for  another delivery month. The price differential  between the contract sold and the contract  purchased is the price of the spread. A trader  "buys the spread" when he purchases the nearby  month and sells the deferred month; he "sells the  spread" when he purchases the deferred month and  sells the nearby month. See generally Johnson &  Hazen, Commodities Regulation sec. 1.03[5][B].

4
 However, the Division was not required to produce  any of its evidence prior to the hearing. See  Chapman v. CFTC, 788 F.2d 408, 410 (7th Cir.  1986) ("'there is no basic constitutional right  to pretrial discovery' in CFTC proceedings")  (quoting Silverman v. CFTC, 549 F.2d 28, 33 (7th  Cir. 1977))

5
 The petitioners also offered their own expert  witnesses to counter Rooney's opinion testimony.  Professor Scott Irvin testified that futures  markets become increasingly less liquid during  delivery periods and that freshening during the  delivery cycle improves liquidity. A CBOT  official testified that the audit trail  irregularities were not uncommon. A veteran CBOT  trader testified that he remembered the charged  trades being conducted by open outcry and that he  did not think that the patterns of trading  indicated pre-arranged trading. The petitioners  also proffered the testimony of a former CBOT  investigator who would have testified that  Rooney's investigation was critically flawed and  that the factors relied upon by Rooney were not  in fact indicative of non-competitive trading.  The ALJ, however, rejected this testimony.

6
 Commissioner Tull dissented. He argued that, as  a former trader himself, he was "uniquely  qualified among [his] fellow Commissioners to  interpret the implications and inferences of the  trading activity that lie at the heart of this  case." R. 175, at 27 (Commissioner Tull,  dissenting). He opined that the evidence was  insufficient to give rise to an inference of  culpability. See id. at 27-28 (Commissioner Tull,  dissenting).

7
 Commissioner Tull believes that he, as a former  trader, is in the best position to judge the  strength of the circumstantial evidence. We  assume, however, that all members of the  Commission are uniquely qualified to make these  sorts of judgments.

8
 This Court has recently criticized the CFTC for  its standards for admitting and considering  expert testimony on the issue of rehabilitation.  See Ryan, 145 F.3d at 921; Cox, 138 F.3d at 275;  LaCrosse, 137 F.3d at 934 n.5.

9
 The Commission is authorized by the  Administrative Procedure Act to review an ALJ's  findings and determinations de novo and make its  own findings of fact. See 5 U.S.C. sec. 557(b);  see also Ryan, 145 F.3d at 917.

52
Easterbrook, Circuit Judge, dissenting.

53
Four  floor traders at the Chicago Board of Trade  executed "freshening" trades in the March 1991  wheat contract. By selling contracts back and  forth, these traders moved to the back of the  delivery queue. Freshening adds liquidity to the  market near contract expiration, when it is much  needed, and enables traders to stay in the market  longer, which assists hedgers who want to retain  opposite positions. The CFTC insists that all  trades be done by open outcry on the floor,  without prearrangement. 17 C.F.R. sec.1.38(a).  Believing that a round-robin of trades among four  traders at a uniform price could occur only by  prior arrangement, the CFTC charged them with  unlawful trading practices. (The charges include  wash sales, in violation of 7 U.S.C.  sec.6c(a)(A), and sales not at bona fide prices,  in violation of sec.6c(a)(B), but these charges  depend on the proposition that the trades were  non-competitive. I therefore focus on  prearrangement.) The contrary view is that the  four traders dealt among themselves because they  were the only ones willing to take the risk at  the end of the contract, that the prices were  uniform because no new information about the  demand or supply of wheat arrived at the market  during the brief periods needed to accomplish the  freshening, and that the events are best  explained as an example of what in antitrust law  would be called oligopolistic interdependence--a  situation that does not support a finding of  agreement. See JTC Petroleum Corp. v. Piasa Motor  Fuels, Inc., 190 F.3d 775, 780 (7th Cir. 1999).

54
Thirteen years ago the CFTC concluded that  symmetrical freshening trades at a uniform price  are enough by themselves to violate federal law.  In re Collins, Comm. Fut. L. Rep. para.22,982  (Apr. 4, 1986), para.23,401 (Nov. 26, 1986). But  in Stoller v. CFTC, 834 F.2d 262 (2d Cir. 1987),  the second circuit disapproved this conclusion  and held that, unless the CFTC has adopted a rule  defining what practices are forbidden, it must  conduct a detailed factual inquiry into the  genesis of the trades. After Stoller the agency  did not adopt such a rule. Although in our case  it held a hearing, in the end the Commission  found, exactly as in Stoller, that symmetrical  freshening trades violate the Act. Today my  colleagues approve this conclusion and create a  conflict with Stoller. For its part, the CFTC  relied heavily on the Collins opinions that the  second circuit declined to enforce, adding only  the puzzling "rev'd on other grounds, Stoller v.  CFTC, 834 F.2d 262 (2d Cir. 1987)." In re Elliott,  1998 CFTC Lexis 25 at *20, Comm. Fut. L. Rep.  para.27,243 (Feb. 3, 1998). What "other grounds"?  That is the last we hear of Stoller from the  Commission--which is to say that, like my  colleagues, the CFTC did not attempt to reconcile  its position with the only judicial authority on  the subject. (The penultimate paragraph of the  majority's opinion says that Stoller is about  wash sales, while this case is about  prearrangement. That's your classic distinction  without a difference. Trades come to be called  "wash sales" because of prearrangement. The  traders' actual conduct in Stoller and this case  appear to be identical. The CFTC demonstrated as  much by relying heavily on Collins, the very  opinion reversed by Stoller. Prearrangement was  the central issue in both cases, and my  colleagues do not offer any reason to believe  that the second circuit would enforce the  administrative order, for at the end of the day  the CFTC disregarded the evidence collected in the  hearing and rested on its a priori view about  freshening at a uniform price, exactly as in  Stoller.)

55
What evidence does this record contain? In  addition to the trades themselves, there are  three kinds. First is testimony by the four  traders, each of whom denied prearrangement. The  ALJ believed this testimony, and the CFTC gave no  reason for disbelieving it other than its view  (the very position rejected in Stoller) that  round-robin trades by themselves demonstrate  prearrangement. Second there was testimony by  other traders that the questioned transactions  were handled by open outcry in the pit, and that  other traders could have participated had they  wanted to do so (and been willing to take the  risk-- much more substantial for other traders  with small positions in the contract than for the  four who sought only to freshen large positions  they already held). This testimony by  disinterested observers, if believed--and the ALJ  did believe it--is incompatible with  prearrangement and demonstrates as well that the  supposed dangers of prearrangement were missing.  (More on this below.) The CFTC did not give a  reason for disbelieving this testimony. The third  stripe of evidence was supplied by Hugh Rooney,  an investigator for the Division of Enforcement,  who testified that the trading pattern was so  unusual that only prearrangement could explain  its details. My colleagues conclude that Rooney's  testimony is junk science of no probative value,  and I agree. With Rooney's views disregarded, the  only differences between this record and the  record in Stoller favor the traders. Yet my  colleagues enforce the CFTC's order. They say that  the Commission's "expert" view is entitled to  deference. Unless we are to abandon all judicial  review of administrative orders, however, we  cannot kowtow to a claim of expertise; the claim  must be supported by evidence and reasoning.

56
Ever since Congress began to establish  independent agencies in 1887, it has been  customary to refer to a commission's "expertise."  This is a figure of speech, an honorific, rather  than a description of commissioners' backgrounds  and skills. It would be more accurate to call  commissioners of the CFTC (and other agencies)  "specialists." None of the Commission's current  members is trained in statistical analysis or  game theory, which might assist in understanding  the dynamics of interactions among a few traders  at the end of a contract. None is an expert in  industrial organization, which could contribute  to understanding oligopolistic interdependence.  None is a financial economist. Only one of the  four Commissioners who participated in the order  under review had any experience in the trading  pits, and he dissented from the decision under  consideration. (Before joining the CFTC, the three  members of the majority were a lawyer, a banker,  and a manager of an agricultural conservation  program.)

57
Courts accept agencies' decisions to the extent  that Congress has delegated authority to them,  not because their decisions may be supported by  unspoken reasoning that is too sophisticated to  be explained to mere judges. Delegation entails  the power to make policy choices. See FCC v.  National Citizens Committee for Broadcasting, 436 U.S. 775 (1978); Chevron U.S.A. Inc. v. Natural  Resources Defense Council, Inc., 467 U.S. 837  (1984). What the CFTC has done here does not amount  to a reasoned policy choice, however. Challenged  by Stoller to draw up a rule (or even announce a  policy) governing freshening, the Commission kept  silent. Instead we have for review a finding of  fact that the four traders prearranged their  activities. Under the Administrative Procedure  Act, the question now is whether that finding is  supported by substantial evidence. 5 U.S.C.  sec.706(2)(E). What evidence might that be, given  that all of the testimony other than Rooney's  favored the traders, and Rooney's is worthless?

58
The usual way to prove agreement is co-  conspirator testimony and physical evidence  consistent with private deals off the trading  floor. Yet everyone in a position to know the  truth testified that there had been no private  arrangement. The ALJ believed this testimony. I  recognize that an agency can disagree with an  ALJ's credibility determination, see Stanley v.  Board of Governors, 940 F.2d 267 (7th Cir. 1991),  but it needs a good reason. Morris v. CFTC, 980 F.2d 1289 (7th Cir. 1992). The usual grounds for  upsetting a credibility decision, such as  internal contradictions in the testimony and  incompatibility between oral and documentary  evidence, are missing. The CFTC's only apparent  rationale for disbelieving the traders is that  their testimony clashes with its a priori belief  that symmetrical trades must have been  prearranged. That circular approach is some  distance from substantial evidence. Perhaps the  CFTC had a more acceptable reason, but it did not  give one. (The principal reason advanced in the  CFTC's appellate brief--that the ALJ did not make  a credibility decision at all, because he applied  the word "truthful" rather than the word  "credible" to the traders' testimony--is  ludicrous.) Because an ALJ's decision to believe  testimony is entitled to weight in the  substantial-evidence calculus even if the agency  disagrees, see Universal Camera Corp. v. NLRB,  340 U.S. 474, 496-97 (1950), the CFTC's lack of a  good reason for its disbelief of the traders  leaves the ALJ's findings intact.

59
Physical evidence is another ordinary way to  show agreement. Yet there are no phone records or  writings consistent with prior arrangement. One  standard form of evidence--so basic that in other  cases the CFTC has insisted on it--is evading open  outcry on the trading floor. If traders  perpetrate hugger-mugger to avoid scrutiny by  their peers, and thus to prevent competitive bids  from being made, then it is sound to infer that  the fix is in and that the "real" price and  quantity were set off the floor. In this case,  though, it is undisputed that any other trader  who wanted to participate could have done so.  Stan Komparda and Robert Williams, both veterans  of the pits, testified that the trades were made  by open outcry and that they could have  participated. Three additional traders, William  Allen, John Warner, and Daniel Henning, testified  that the pattern of round-robin trading in which  petitioners engaged was common in the closing  month of a contract. My colleagues' footnote 5,  which refers to "a" veteran trader, understates  the force of this testimony. But the CFTC itself  simply ignored it.

60
Well, if all the testimony other than Rooney's  contradicts the CFTC's position, and if Rooney  lacked a foundation for his conclusions, how  could the CFTC reach the conclusion it did? It gave  two hints.

61
One is that audit trail irregularities occurred.  So much is undisputed, but what makes the  irregularities (a word the CFTC applies to all  errors; it does not connote intentional  wrongdoing) the basis for an inference that the  trades were prearranged? Trading cards frequently  are altered, because traders write things down  wrong when fast-breaking events distract their  attention. The question is not whether errors  occurred in the documentation of the trade, but  whether these were unusual, and, if so, whether  the nature of the departure from the norm implies  that misconduct was afoot. The CFTC was silent on  both of these questions. It did not find (or  point to anything in the record that could  support a finding) that the irregularities here  were abnormal. If the number and kind of  irregularities were normal for this type of  trading, then there is no basis for an inference  that hanky-panky occurred. As for the second  question--whether these errors imply  prearrangement--the Commission did not explain  its thinking. An outsider may be excused for  believing that the Commission got it backward. If  the four traders prearranged their dealings, then  why aren't the audit trails flawless? It is  letter-perfect trading cards, not normal errors,  that would point to an existing deal. (Similarly,  in antitrust law, it was the rotation of bids by  the phases of the moon that signaled the  conspiracy among electrical equipment  manufacturers. The random noise of a competitive  market would have stamped out any such pattern.)

62
Perhaps the CFTC had some reason for thinking  that errors, rather than perfection, show  prearrangement--but what matters now is that the  Commission did not give a reason. Courts do not  think that an expert's bare conclusion is the end  of the inquiry. See, e.g., Huey v. United Parcel  Service, Inc., 165 F.3d 1084, 1087 (7th Cir.  1999) ("An expert who supplies nothing but a  bottom line supplies nothing of value to the  judicial process", quoting from Mid-State  Fertilizer Co. v. Exchange National Bank, 877 F.2d 1333, 1339 (7th Cir. 1989), and citing many  other cases); McMahon v. Bunn-O-Matic Corp., 150 F.3d 651, 657-58 (7th Cir. 1998); Vollmert v.  Wisconsin Department of Transportation, 197 F.3d 293, 298-99 (7th Cir. 1999). All we have on the  audit-trail irregularity, however, is a bottom  line; all of the reasoning, and all of the  intermediate facts (such as whether this audit  trail was unusual) have been omitted.

63
The other non-testimonial approach, and the one  on which my colleagues principally rely, is the  Commission's belief that the trading reflected "a  precision and symmetry not generally found in  competitively executed trades." (CFTC Order at 14, quoted by the majority 202 F.3d at 933 and elsewhere.) That  is a proposition of fact. Were these trades  unusually symmetrical?Do competitive markets  generate symmetrical trades, and if so what  portion of trades have these characteristics? The  record is silent on these issues. Rooney asserted  that something unusual had happened, not as a  statement of historical fact (he did not bother  to analyze how trades occur when markets are  operating normally) but as a preconception that  cross-examination showed to be unfounded. Thus  the cornerstone of the CFTC's decision is bereft  of evidence. (That petitioners' trading sequences  were not identical to each other, something my  colleagues emphasize, id. at 936-37, is beside  the point. No rule of law says that the first  round of freshening on a given day sets a  baseline to which all other rounds must conform.  We need to know how a given pattern relates to  the market. Some differences are predictable; to  repeat a point already made, the mark of  prearrangement would be identical sequences, not  the normal differences that characterize  competitive markets.)

64
Suppose this issue had been analyzed by a  student of markets skilled in statistical  methods. Such a person would have gathered  information about trading patterns and inquired  whether the pattern in this month was unusual.  Then the expert would have asked whether the  nature of this departure from the norm could best  be attributed to prearranged trades or to some  other matter--such as the fact that only four  traders were active, so they were necessarily  dealing only with each other. This happens all  the time in discrimination cases. An expert asks  not only how many members of a minority group the  employer hired, but also whether this number was  expected (which depends on the applicant pool)  and, if not, whether it was so unusual that an  inference may be drawn that race or sex is an  explanatory variable. Courts insist that these  experts perform careful work and use  statistically valid methods. See, e.g., Hazelwood  School District v. United States, 433 U.S. 299,  308-09 n.14 (1977); Hill v. Ross, 183 F.3d 586,  591-92 (7th Cir. 1999); Mister v. Illinois  Central Gulf R.R., 832 F.2d 1427 (7th Cir. 1987).

65
No statistical analysis appears in the CFTC's  opinion, however, and a raw bottom line can't be  "substantial evidence." Our recent opinion in  Chicago Board of Trade v. SEC, 187 F.3d 713 (7th  Cir. 1999), and the D.C. Circuit's thoughtful  opinion in Bechtel v. FCC, 10 F.3d 875 (D.C. Cir.  1993), stress that an agency must act like an  expert if it wants the judiciary to treat it as  one. In both Chicago Board of Trade and Bechtel  the court set aside an agency's order when it  failed to undertake the sort of empirical inquiry  necessary to support the factual propositions  essential to its decision. Just so here.

66
The Commission's opinion is problematic on  additional grounds. Let me start with the  rationale for banning prearranged trades, leading  into the question whether this episode fits the  rationale.

67
Wash sales are said to be bad for two reasons:  first, they can give the illusion of price  movements, which draws victims into the market  (and also undermines the value of price signals);  second, they can be used to reallocate profit  from one trader to another. Reddy v. CFTC, 191 F.3d 109, 115 (2d Cir. 1999); Philip McBride  Johnson & Thomas Lee Hazen, I Commodities  Regulation sec.2.05[5] at p. 2-58 (3d ed. 1999).  The classic story is one in which schemers trade  back and forth with each other at inflated  prices. These trades are safe for the schemers  because the transactions offset one another  (neither party gains or loses a cent) but  dangerous to persons not aware of the sham.  Outsiders take the higher price as a real one and  may buy at the inflated price. When the wash  sales stop, the price returns to its original  level and the victims lose. The schemers, who  have sold securities or contracts to the victims,  make off like bandits. See Daniel R. Fischel &  David J. Ross, Should the Law Prohibit  "Manipulation" in Financial Markets?, 105 Harv.  L. Rev. 503 (1991). In our situation, by  contrast, prices were stable during the round-  robin trading, and no outsiders were gulled.  Oddly, the CFTC seems to think that thelack of  price movement shows that something is amiss, but  this implies instead that the Commission does not  understand how prices are set in competitive  markets. In commodities futures markets, prices  move only in response to information about supply  and demand for the physical commodity. The four  traders were changing places in the delivery  queue; such trades by definition produce no new  information about supply of or demand for wheat  and therefore should not affect price. Only  prearrangement could have produced price  movements without information significant to  consumers. The lack of price movement is  therefore a mark in the traders' favor.

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The second concern about prearranged trades is  reallocation of profits. Suppose the March-July  spread is 21¢ per bushel, but the traders have  received information about grain supplies leading  them to believe that the spread will increase,  say to 25¢. Orders are supposed to be executed in  sequence, and whichever customer is first in line  should make a substantial profit. If the traders  can engage in a private deal, however, one may  transact with another at a 21¢ spread for this  customer's account (depriving the customer of the  profit) and the buyer will resell the contract at  a 25¢ spread, obtaining the profit for himself  (and presumably sharing some with the cooperating  floor trader). Out-of-sequence execution and  other non-competitive strategies can be a serious  problem when, as in this example, it allows  traders to enrich themselves at customers'  expense.

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But in our case it is agreed that no such thing  happened--and not just because all of the  witnesses said that the transactions were done by  open outcry, so that any departure from the  market price would have induced other traders to  leap in. The reason no customer was hurt, or even  at risk, is that there was no customer, period.  The four traders were trading for their personal  accounts.

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Neither of the two reasons why the CFTC believes  that prearranged trades can be bad for futures  markets is present. Many trades arranged off the  trading floor pose no risk of deceit. Stock  markets, which used to follow a rule against  prearranged trades, have for years allowed deals  to be reached off the floor and executed on it;  many trades are now handled completely off-  exchange. By most accounts the change improved  the efficiency of stock markets. Whether the  contrary position that the CFTC imposes on futures  markets is sensible is not, however, a question  presented for our consideration. Nonetheless,  important interests are at stake. These are the  interests served by freshening trades. Following  the unanimous view of commentators, my colleagues  allow that freshening serves a useful purpose. 202 F.3d at 928 & n.2. Permitting the practice  encourages more traders to stay active later,  which improves liquidity for the whole market.  Having the ability to freshen near expiration  (and thus avoid delivery) makes futures markets  more attractive to speculators, who are essential  to efficiency because speculators accept the risk  that hedging traders want to divest. See Merton  H. Miller, Financial Innovations & Market  Volatility 200 (1991). Well, if this is so and  freshening serves multiple good purposes, and if  there is no interest on the other side of the  ledger, then the outcome of this case can do  nothing but impose needless costs on all  participants in futures markets. That was what  led Stoller to set aside the Commission's order:  the second circuit thought that by penalizing  round-robin trades as if they had been  prearranged, all the Commission would do was  inflict a random penalty on freshening. That  proposition is still true. The CFTC thought the  symmetry of the transactions proof of  arrangement. But most if not all freshening  trades will be symmetrical, if the traders do  their jobs right. To complain about symmetry is  to complain about freshening in the closing weeks  of a contract (when few traders remain)--which is  contrary to the premise that freshening is  lawful.

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One final comment about the CFTC's reasoning. The  Commission thought it significant that the  traders were interdependent--which is to say that  they held large open positions and thus could  accommodate one another. The Commission remarked  in passing (and my colleagues' opinion repeats,  also in passing) that something was suspicious  because in the initial trade one trader suffered  a loss. One trader always initiated by buying the  spread, even though all four wanted (in the end)  to sell the spread in order to freshen. The  traders say that this is normal, that once they  see that a round of freshening is in prospect  they are willing to buy first because they  understand that when the cycle is completed all  books will balance. Suspicion then arises: why  didn't the trader who got the gain in the first  deal break the circle and keep the gain, leaving  the others holding the bag? The answer is: "fool  me once, shame on you; fool me twice, shame on  me." The trader who breaks the cycle will be  shunned and excluded from freshening in future  months, much to his loss.

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You don't need to be an expert in game theory  to see this point, but it can't hurt that formal  analysis demonstrates that the prospect of repeat  dealing induces people to adopt cooperative  behavior without agreement. The prospect of  future interactions, and not explicit deals, is  what keeps games of mutual interdependence going.  See Douglas G. Baird, Robert H. Gertner & Randal  C. Picker, Game Theory and the Law 159-87 (1994).  Does the CFTC really think that it has falsified  central conclusions of modern game theory? No, it  doesn't. It has simply ignored the subject.

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What to do about the way in which repeat  interactions lead small numbers of players to act  as if they had agreed is a question that comes up  in many parts of the law. Think of oligopolistic  interdependence in antitrust. A market has three  large firms, with equal shares. None of the three  leads the way in cutting prices, even though each  knows that it could improve profits in the short  run by cutting price and making extra sales  before the other two react. But it doesn't,  because it knows that the long-run equilibrium  would be equal shares at lower prices for all  three firms.

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By the logic of the CFTC's position, we should  (perhaps must) infer that the firm's failure to  maximize its short-run profits demonstrates  agreement with the other two firms; and of course  an agreement is a cartel, illegal per se under  the Sherman Act. Antitrust has the same formal  structure as the commodities laws. An outcome  produced by agreement is illegal; the identical  outcome produced by the game-theoretic effects of  repeat dealing is lawful. Do we then use the  observed behavior--consistent with both agreement  and interdependence--to infer agreement and  forbid the conduct? The answer in antitrust law  has been "no," as we explained in JTC Petroleum.  Perhaps the CFTC has a good reason why the answer  to the oligopolistic interdependence question in  antitrust is wrong, or why it does not apply to  commodities trading. My colleagues surmise that  economic differences between futures markets and  physicals markets justify a legal difference. 202 F.3d at 936. Perhaps so; perhaps not. Yet the  Commission did not confront this question. Courts  are limited to the justifications the agency  itself gives. SEC v. Chenery Corp., 318 U.S. 80,  88 (1943). The CFTC simply assumed that if given  conduct would be unusual unless either (a)  agreement had been reached, or (b) small numbers  produce interdependence, then explanation (a)  must be the right one even in a small-numbers  case. It did not attempt to grapple with traders'  interdependence, the parallel to antitrust law,  the holding of Stoller, or any related issue, and  Chenery forbids us to fill those gaps.

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Still, it is conceivable that the traders  prearranged their freshening. Statistical  analysis might show that the pattern of trades  early in 1991 was abnormal (as the CFTC asserted).  Or consider the interdependence issue. One of the  four tradersbegan each round by buying the  spread, greatly increasing his risk (unless the  others cooperated by buying back), although each  needed to sell the spread and then buy later.  They say that they understood what had to happen,  so there was no real risk. Well, that's testable.  Take a month in which the CFTC does not suspect  agreement and see whether some traders who end up  freshening a position enter with buy orders. Or  take such a month and determine what portion of  freshening trades are symmetrical or confined to  small groups. The CFTC treated trades without  profit as proof of agreement; but maybe all it  shows is that in a world with a lot of trades,  some days will look like this even though most  don't. (Similarly, if you flip a fair coin, it is  even money that you'll get 10 heads in a row  before 1,000 flips are done.) If this pattern  happens one closing month in 100, then all the  CFTC has proven here is that if you wait long  enough you'll find this pattern--but without  finding any agreement. But if in months that the  CFTC deems normal no big trader ever leads by  buying the spread, then the order in this case  would be sustainable. A remand thus could be  justified, but enforcement of this order cannot  be.