A Chicago jury took one hour to find a trader guilty of “spoofing” some of the world’s largest commodities futures markets by deceptive electronic trading. On Tuesday, Michael Coscia was found guilty of 12 counts of fraud and “spoofing” by attempting to flood the gold, corn, soybean and crude oil futures markets with small orders, which he intended to cancel prior to execution. This case marked the first test of anti-spoofing legislation which was enacted in the 2010 Dodd-Frank Act.
Spoofing occurs when traders rapidly place orders with the intent to cancel them before the trades can be executed – all with the intent to deceive other investors to believe that there is a spike in demand for the commodity. This tactic has become increasingly prevalent with the emergence of electronic trading which has taken the place of face-to-face trading in commodity “pits.” Federal authorities, and market experts, believe that this type of activity could not have occurred in face-to-face trading, but “spoofers,” like Coscia, can now use the anonymity of electronic trading to manipulate demand.
Federal prosecutors charged that Coscia made $1.4 million in nine weeks on the Chicago Mercantile Exchange (CME) in late 2011 by using his small trading company, Panther Energy Trading, to flood the market with huge orders for futures contracts that he never intended to execute. The government alleged that Coscia used a custom-designed algorithm to “bait and switch” investors. The repeated spoofs moved prices for a few thousandths of a second, which was long enough for him to illegally profit on small trades in the fast moving futures market. Coscia’s attorneys argued that the law was hopelessly vague and that there were no true victims damaged by the actions as competitors in the market were sophisticated professionals.
The guilty verdict marks an important win for federal securities prosecutors who are still reeling from the recent Newman decision and its impact on insider trading prosecutions. The verdict also provides a bright line rule for high frequency trading: traders who use an algorithm to automatically cancel trades will be deemed to be spoofing. The verdict also supports the upcoming prosecution of Navinder Sarao, a British trader accused of causing the 2010 “flash crash” which temporarily wiped $1 trillion off of the value of U.S. securities.
Coscia’s prosecution is also notable given that he was criminally charged by prosecutors after agreeing in 2013 to settle civil charges relating to this activity. Coscia’s sentencing is scheduled for March 2016.