Milestone U.S. oil manipulation case unsettles traders NEW YORK (Reuters) - U.S. regulators' $14 million settlement with high-frequency trading firm Optiver over oil price manipulation in 2007 is a "milestone" victory in their toughening stance on market malfeasance which is being closely watched by traders. In its first major case against an algorithmic trader and the biggest financial penalty involving manipulation in the oil futures market, the Commodity Futures Trading Commission said late Thursday that a court settlement required the Amsterdam-based company to disgorge $1 million in profits and pay $13 million over allegations it used a rapid-fire tool nicknamed "The Hammer" to influence U.S. oil prices in 2007. The ruling came just two days after U.S. President Barack Obama proposed a renewed campaign against illegal oil trading schemes. But the case dates back to the Bush administration's effort to crack down on surging oil prices in late 2007 and 2008 as crude soared toward a record of nearly $150 a barrel. The CFTC alleged that traders in Optiver's Chicago office engaged in a practice called "banging the close," in which the firm attempted to move U.S. crude, gasoline and heating oil prices by executing a large volume of deals during the final moments of trading, when exchanges set "settlement" prices. The regulatory agency also alleged that an Optiver official lied to cover up the scheme. The case was viewed as a litmus test of the CFTC's efforts to get more aggressive over market manipulation, a charge that has historically been difficult to prove, despite mounting political pressure to take rogue traders to task. Financial reforms have given it even more leeway to pursue malfeasance. "CFTC has reached a milestone, that is what matters," said Yusuke Seta, a commodity sales manager at brokerage Newedge in Japan. Tougher regulation will always be tough for traders. I am concerned that it could cause a loss of liquidity. Sometimes it is hard to distinguish the line that separates manipulation and usual trading. The CFTC launched a major investigation into oil prices in 2008. The Optiver case, announced in July of that year, was the first to emerge from that effort. "Manipulative schemes like "banging the close' harm market integrity, and false and misleading statements to exchange officials to cover tracks obstruct the investigative process," he said. Optiver, which neither admitted nor denied the CFTC's allegations as is common in such settlement cases, said it was "pleased to put this matter behind it." The settlement barred Christopher Dowson from trading commodities for eight years, Randal Meijer for four years and Bastiaan van Kempen for two years. Two of the three defendants, Meijer and van Kempen, have since left the firm. The company itself was barred from trading U.S. oil futures in the three minutes before the market closes for two years. The fine was less than the $19.3 million that Optiver had set aside for the case in its 2010 annual report. High-frequency and algorithmic traders have been watching the Optiver case closely amid worries that other automated trading programs could be deemed manipulative, though most firms define themselves as market makers and liquidity providers rather than proprietary trading shops. Optiver, founded as a one-man operation by options trader Johann Kaemingk in Amsterdam in 1986, was considered a pioneer in the closely knit high-frequency and algorithmic trading communities of Amsterdam and Chicago. The firm trades only with its own capital, and has no clients. The CFTC complaint said Optiver and van Kempen made false statements to New York Mercantile Exchange compliance officials in an effort to conceal the manipulative scheme. The defendants had attempted to manipulate NYMEX U.S. crude oil, gasoline and heating oil contracts 19 separate times during 11 days in March 2007, according to the complaint. In a copy of the private company's 2010 annual report obtained by Reuters last year, the firm reported trading income of 551.1 million euros (about US$800 million) in 2007 and 710.6 million euros in 2008. The CFTC is expected to review high frequency trading, which has come in for fierce criticism since the equity market "flash crash" in May 2010. Additional reporting by Karey Wutkowski, Sarah Lynch and Alexandra Alper in Washington, D.C., Florence Tan in Singapore; Editing by Bernard Orr and Robert Birsel