Alert
Alert
01.04.16
This alert also was published as a bylined article on Law360 on January 7, 2016.
On November 3, 2015, an Illinois federal jury convicted Michael Coscia, a high-frequency commodities trader, of six counts of commodities fraud and six counts of spoofing—entering a buy or sell order with the intent to cancel before the order’s execution.1 Coscia’s conviction was the first under the criminal anti-spoofing provisions added to the Commodity Exchange Act (CEA) by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. In the press release touting its victory, the prosecution announced: “The jury’s verdict exemplifies the reason we created the Securities and Commodities Fraud Section in Chicago, which will continue to criminally prosecute these types of violations.” High-frequency traders should take note that the conviction on all six counts of spoofing charged in Coscia’s case may embolden prosecutors across the nation to pursue other spoofing cases with vigor. Given the real possibility of a felony indictment and conviction for spoofing—the latter of which exposes a defendant to imprisonment for up to ten years and significant monetary fines—high-frequency traders should carefully evaluate their strategies and conduct.2
The Indictment
The indictment against Coscia alleged that he, a former floor trader registered with the Commodity Futures Trading Commission (CFTC), “devised, implemented, and executed a high-frequency trading strategy in which he entered large-volume orders that he intended to immediately cancel before they could be filled by other traders.”3 According to the indictment, this strategy “create[d] a false impression regarding the number of contracts available in the market” and “fraudulently induce[d] other market participants to react to the deceptive market information that he created.” Coscia would then apply this strategy “in the opposite direction to immediately obtain a profit by buying future contracts at a lower price than he paid for them, or by selling contracts at a higher price than he paid for them.”
To carry out this strategy, Coscia allegedly designed computer programs that would place a “ping order” for one contract “to test the market and ensure that market conditions would allow his fraudulent trading strategy to work.” Coscia’s trading programs would “place a ‘trade order’ on one side of the market, intending that the trade order be filled.” On the other side of the market, Coscia would place “several layers of ‘quote orders,’” to create the illusion of market interest. According to the indictment, the “quote orders” would “typically be the largest orders in the market within three ticks of the best bid or offer price, usually doubling or tripling the total quantity of contracts within the best bid or offer price.” Coscia programmed his trading programs to cancel the “quote orders” “within a fraction of a second automatically” and “without regard to market conditions.”
The spoofing counts alleged in the indictment focused on six of Coscia’s September 2011 transactions in the gold, Euro, soybean meal, soybean oil, British point, and high-grade copper futures markets. Coscia only netted $1,070 from those six transactions. The indictment, however, alleges that Coscia made approximately $1.5 million as a result of his scheme. Each spoofing count carries a maximum sentence of 10 years imprisonment and a $1 million dollar fine. Each count of commodities fraud carries a maximum sentence of 25 years imprisonment and a $250,000 fine.
Download: Spoofing Is No Joke: Prosecutors Clamp Down on High-Frequency Traders