As part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress amended the Commodities Exchange Act (CME) to add a new section of Prohibited Transactions entitled “Disruptive Practices.” Those prohibited practices include any trading “commonly known as ‘spoofing,’” i.e., to conduct bid or offer activity for any product traded on a Designated Contract Market (DCM) or Swap Exchange Facility (SEF) with the intent to cancel the bid or offer before execution. According to CFTC, bids or offers designed to overload a quotation system, delay another person’s trade execution, give the appearance of false market depth, or create artificial price movements, unlawfully disrupt fair and equitable trading and are, therefore, unlawful.
On July 22, 2013, the CFTC entered its first order finding a violation of the anti-spoofing provision. In that order, the CFTC found that Panther Energy Trading LLC and its owner, Michael J. Coscia, placed algorithmic bids and offers in 18 futures contracts on the CME Group’s electronic trading platform that they intended to cancel prior to execution. As the CFTC further stated, by placing large buy-and-sell orders they had no intention of executing, Panther Energy and Coscia sought to give the market the impression that there was significant market interest in the futures contracts. The subsequent market price movement in reaction to these orders allowed Panther Energy to profit on the relatively small counter bids and offers it simultaneously executed at the time it placed, and then canceled, its large orders, amassing a $1.4 million net profit in a little more than two months. As a result of this violation, the CFTC assessed a $1.4 million civil money penalty, ordered disgorgement of the $1.4 million profit, and issued a one-year trading ban against Panther Energy and Coscia. In a press release, the CFTC further noted that the United Kingdom’s Financial Conduct Authority – with whom the CFTC cooperated in investigating the spoofing activity – imposed a penalty of approximately $900,000 against Coscia, relating to similar market-abuse activities on the ICE Futures Europe exchange.
The order in the Panther Energy Trading matter comes amidst several other high-profile CFTC enforcement actions. Consistent with CFTC Enforcement Director David Meister's expressed desire to “bring high-impact cases that [can] influence market behavior,” the CFTC recently has undertaken significant enforcement actions against marquee respondents such as, for example, the multi-billion-dollar enforcement action against several multi-national banks for an alleged manipulation of LIBOR, as well as the June 2013 action against former New Jersey Governor Jon Corzine for the alleged misuse of nearly 1 billion dollars in customer funds. As Enforcement Director Meister has further commented, the additional powers the Dodd-Frank legislation gave the CFTC have "changed the game" by broadening the CFTC’s jurisdiction, expanding reporting requirements, prohibiting additional trading practices, and easing intent requirements for proving certain CEA violations. As the recent CFTC actions demonstrate, the agency is intent on using these powers.