High speed trading is a frequently discussed and much studied technique used to trade in the securities and futures markets. The SEC is studying the approach. The CFTC has also been evaluating the trading technique and is considering possible regulations. CFTC Commissioner Bart Chilton, who named such traders “cheetahs” because of their speed, has proposed a basic regulatory system for these traders that focuses on the safety and security of their computer systems to avoid market disruptions. It would be implemented while the merits and market impact of the approach is evaluated.
Three regulators announced settled actions centered on abusive high speed trading this week. The CFTC and the CME Group brought proceedings against Panther Energy Trading and Michael Coscia. The Financial Conduct Authority also imposed sanctions on Mr. Coscia for similar conduct in the UK.
The actions by the CFTC and the CME group centered on trading on four exchanges owned by the CFE Group from early August to mid-October 2011. During that period the two traders repeatedly employed a manipulative technique known as “spoofing.” It involves placing a relatively small order on one side of the order book, subsequently placing large orders on the opposite side and then canceling the larger orders while permitting the smaller ones to be executed. Thus, for example, the traders would place small sell orders followed by large purchase orders. The latter were intended to show liquidity and interest, drawing others to the market and facilitating the execution of the smaller sell orders. The process would then be reversed. The two traders utilized this technique in trading 18 futures contracts involving commodities such as Light Sweet Crude Oil, Natural Gas, Corn, Soybean, Soybean Oil, Soybean Meal and Wheat contracts.
The CFTC entered orders requiring the two traders to pay $1.4 million in penalties and to disgorge an equal amount in trading profits. The traders will also be banned from trading on any CFTC registered entity for one year. The amounts paid will be offset by any amount paid to resolve the charges with the CME Group.
CFTC Commissioner Chilton issued a separate statement regarding the settlement. While he concurred with the settlement he argued that a “much more significant” trading ban should have been imposed in view of the egregious conduct involved.
The CME Group, by virtue of disciplinary actions taken by its exchanges, has imposed a fine of $800,000 and order disgorgement of about $1.3 million against the two traders The Group also issued a six month trading ban on its exchanges against Mr. Coscia.
The FCA imposed sanctions on Mr. Coscia for similar trading that took place in September and October 2011 on the ICE Futures Europe Exchange in the UK. During that period Mr. Coscia engaged in what the regulator called “layering,” the equivalent of spoofing. Using direct market access, Mr. Coscia profited from layering in futures for Brent Crude Oil, WTI Crude Oil and Gas Oil. The regulator imposed a fine of €597,993 or $903176. Mr. Coscia received a 30% discount on the amount of the fine for agreeing to settle under the FCA’s executive settlement procedures.