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Markets Regulation
Trader faces criminal ‘spoofing’ charges
From the Financial Times of Thu, 02 Oct 2014 17:50:36 GMT
High frequency trading

A high-frequency trader has been indicted on charges that he manipulated commodities markets by “spoofing” – marking the first time US authorities have criminalised the practice.

Commodities trader Michael Coscia, owner of Panther Energy Trading in New Jersey, allegedly used computer algorithms to submit false bids, known as spoofing, to trick the market into thinking there was buying and selling interest in a range of commodities futures, including gold, soyabean meal and high-grade copper.

Prosecutors allege that once buyers stepped into the market driving the prices up, he would cancel the orders and sell his position at artificially high prices. Between August and October 2011 he made nearly $1.6m by defrauding participants in the CME Group and ICE Futures Europe markets, according to the indictment.

“Traders and investors deserve a level playing field, and when the field is tilted by market manipulators, regardless of their speed or sophistication, we will prosecute criminal violations to help ensure fairness and restore market integrity,” Zachary Fardon, the US attorney for the Northern District of Chicago, said in announcing the charges.

Mr Coscia was indicted on six counts of commodities fraud and six counts of spoofing. It is the first prosecution to be brought under the 2010 Dodd-Frank law that bans the manipulative trading practice.

He faces as much as 25 years in prison if found guilty. He will be arraigned on the charges at a future date. Mr Coscia’s attorney declined to comment on the allegations.

The criminal charges are a signal to the market and also to Mr Coscia personally. Last year he agreed to pay $2.8m to settle civil charges alleging the same misconduct with the Commodity Futures Trading Commission, and the UK’s Financial Conduct Authority imposed a fine of $903,000 (£597,000). The criminal investigation was launched after the civil cases were settled, according to people familiar with the matter. At the time it was the first action by the CFTC under its new powers granted by the Dodd-Frank law.

The criminal charges come as regulators and law enforcement agencies are investigating the role of high-frequency traders and whether they are manipulating the market. To date there have been a handful of civil actions taken by regulators over spoofing, but it had not previously been elevated to a criminal prosecution.

To prove the case, law prosecutors need to show that Mr Coscia placed the orders with no intention of filling them. The case will probably draw the attention of the market, where many orders are cancelled daily.

Last month, the CME adopted a new rule expressly prohibiting disruptive trading including spoofing. Among the factors exchange monitors watch for is “whether the market participant’s intent was to induce others to trade when they otherwise would not”, according to the rule. The CME declined to comment on the charges.

Additional reporting by Neil Munshi

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