The Commodity Futures Trading Commission filed papers in its lawsuit against a proprietary trading firm and its principal, claiming that the federal law prohibition against spoofing is not unconstitutionally vague. The defendants in that action previously made a motion to the federal court in Chicago hearing the CFTC’s lawsuit that charges against them should be dismissed because, among other reasons, the definition of spoofing under law does not provide adequate notice regarding the prohibited conduct. (Click here for details in the article, “Alleged Spoofer in CFTC Enforcement Action Claims Relevant Statute and Regulation Unconstitutionally Vague” in the May 15, 2016 edition of Bridging the Week; under applicable law, “[i[t shall be unlawful for any person to engage in any trading, practice, or conduct on or subject to the rules of a registered entity that … is, is of the character of, or is commonly known to the trade as, ‘spoofing’ (bidding or offering with the intent to cancel the bid or offer before execution).) The CFTC claimed that “the spoofing provision [of the relevant law] is clear, and Defendants’ conduct … falls clearly within that language.” In this matter, the CFTC claimed that defendants placed orders on one side of the market with the intent to cancel them as evidenced by “(1) their pattern of cancelling those orders in less than a second and simultaneously flipping to the other side of the market to execute against market participants tricked by the spoof orders; (2) the difference between the fill and cancellation rates for the spoof orders, versus the flip orders, and (3) the placement of the spoof orders to avoid getting filled.” The defendants previously argued in support of their motion to dismiss that the CFTC has never provided official notice of what activity might qualify as spoofing or be of “the character of or commonly known to the trade as ‘spoofing.’” Defendants argued that “[t] he CFTC has had five years to try to rectify the vagueness of the Spoofing Statute by issuing a rule or regulation to prohibit trading practices that may constitute spoofing, but it has failed to do so.” As a result, said defendants, the relevant federal statute is void for vagueness.
My View: Although the relevant provision of law defines spoofing very precisely in a parenthetical phrase as “bidding or offering with the intent to cancel the bid or offer before execution,” defining an offense – if the definition is wrong or universally regarded as unclear – does not provide the type of fair notice that is necessary to make a law constitutionally valid. When the Financial Industry Regulatory Authority recently issued report cards to member firms to help them detect potential spoofing and layering activity, for example, it defined spoofing as “entering orders to entice other participants to join on the same side of the market at a price at which they would not ordinarily trade, and then trading against the other market participants’ orders.” FINRA’s definition does not require intent to cancel the bid or offer before execution; however it requires order placement on both sides of a market. (Click here for background on FINRA’s new spoofing report cards in the article, “FINRA Hands Out Report Cards on Potential Spoofing and Layering” in the May 1, 2016 edition of Bridging the Week.) Although the CFTC may believe that everyone knows what spoofing is, the relevant statute is badly drafted and the parenthetical language that supposedly defines spoofing embraces both legitimate and potentially problematic conduct. Indeed, the CFTC acknowledged in its court papers last week that this was the industry’s position “under a literal reading of the spoofing provision.” However, argued the CFTC in its papers, “[t]he Complaint [in this matter] had nothing to do with these industry concerns.” It seems disingenuous for the CFTC to concede the controversy but claim it is irrelevant. If a law is too sweeping in scope, though it may be worded precisely, it does not provide adequate notice of what is allowed or prohibited.