The trader and his company subject to an enforcement action by the Commodity Futures Trading Commission in a federal court in Chicago for alleged spoofing through posting and flipping trading conduct, filed a motion to dismiss the CFTC’s action on the grounds that the law prohibiting spoofing (click here to access 7 USC § 6c(5)) and the CFTC rule prohibiting deceptive contrivances (click here to access CFTC rule 180.1) are constitutionally void for vagueness. (Click here for details regarding this enforcement action in the article, “CFTC Enforcement Action Introduces New Theory of Spoofing” in the October 25, 2015 edition of Bridging the Week.) According to papers filed by the defendants in support of their motion, 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.” Defendants acknowledged that the CFTC issued a guidance and policy statement in May 2013 regarding spoofing (click here to access), but said that document “does not conclude that there is any common understanding in the trade of what constitutes ‘spoofing’ or set forth what that understanding might be.” Just recently, a federal court judge refused to set aside the spoofing conviction of Michael Coscia, declining to find the relevant statute void for vagueness. (Click here for details of this decision in the article, “Federal Court Declines to Set Aside Coscia Spoofing Conviction” in the April 10, 2016 edition of Bridging the Week.)
My View: From the outset, I have had difficulty understanding the meaning of “spoofing” as defined under the Commodity Exchange Act. Although the law expressly defines spoofing 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, FINRA 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” – a very different definition than that in the CEA. (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 CME Group enacted a provision prohibiting spoofing that parallels the similar CEA provision, it issued an advisory that made clear that the concept of spoofing is muddy at best. For example, a stop order is often placed with the desire that it will never be executed because execution would mean that a position is moving in an adverse direction. However, CME Group distinguished between “intent” and “hope” when saying that stop orders did not violate its prohibition against spoofing in a way that leaves a reasonable person rightfully scratching his or her head:
Market participants may enter stop orders as a means of minimizing potential losses with the hope that the order will not be triggered. However, it must be the intent of the market participant that the order will be executed if the specified condition is met. Such an order is not prohibited [by the applicable CME Group] Rule.
Indeed, if there was any doubt regarding the vagueness of what is prohibited, the Intercontinental Exchange, through three of its exchanges in Europe, Canada and the United States, uses three similar but subtly differently drafted rules to prohibit disruptive trading. (Click here for details of ICE’s different rules in the article, “ICE Futures Europe to Adopt Another Variation of Disruptive Trading Practices Rule” in the January 11, 2015 edition of Bridging the Week.) Even at the same time that Michael Coscia settled with the Commodity Futures Trading Commission in 2013 for prohibited “spoofing,” he settled with the Financial Conduct Authority in the United Kingdom for the identical conduct – but there it was termed “layering” (click here to access a copy of FCA’s Final Notice regarding Mr. Coscia). The CEA provision prohibiting spoofing was badly drafted because it prohibits a named activity that has different meanings to different people rather than banning the purportedly bad conduct itself. There is no one commonly accepted definition of what constitutes spoofing, despite the parenthetical clause in the applicable law. Thus, there is no fair notice of what is prohibited.