US prosecutes high-speed trader in first criminal spoofing trial

A trader on the New York Stock Exchange on Oct 22, 2015.
A trader on the New York Stock Exchange on Oct 22, 2015. PHOTO: EPA

CHICAGO (REUTERS) - The US government squared off in a Chicago courtroom on Monday (Oct 26) against a high-frequency trader accused of using computer algorithms to illegally move market prices, testing its ability to enforce a new "anti-spoofing" law.

Prosecutors said Michael Coscia, the owner of Panther Energy Trading LLC, "spoofed" the market when he designed two algorithms programmed to create an illusion of market interest, according to an indictment unveiled last year.

In spoofing, a trader may flood the market with orders to buy contracts. Once the price moves up, he or she will sell at a higher price and immediately cancel the bulk of the buy-orders.

Coscia, 53, reaped nearly US$1.6 million through orders he placed in 17 markets operated by CME Group Inc and three operated by London-based ICE Futures Europe, according to the indictment.

His programs, known as "Flash Trader" and "Quote Trader,"were designed to cancel orders within a fraction of a second automatically.

Coscia denies the allegations, saying he did not engage in any fraudulent or unlawful trading activity. Coscia entered every order with the intent to trade it, his lawyer, Steven Peikin of the firm Sullivan and Cromwell, told a jury in Chicago.

"The prosecutors have just got this case all wrong," Mr Peikin said.

This is be the first time the US Justice Department has taken a trader to trial for violating the anti-spoofing law, a relatively new statute that was part of the 2010 Dodd-Frank Wall Street reform bill.

Defense lawyers say the law is vague and lays the groundwork for prosecutors to criminalize potentially legitimate trading activity.

Coscia's lawyers suffered a setback earlier this year, though, when US District Judge Harry Leinenweber refused to toss the indictment on those grounds.

The government must convince the jury that Coscia intended to spoof the market. Prosecutors on Monday spent time explaining the basics of what futures markets are and how they work, laying critical groundwork to make their case.

"The case will have so much technical detail that it is going to be very hard for the jury to understand the subject matter of the case," said Chris Gair of the Gair Law Group, who is not involved in the case.

Later this week, traders who operated in the same markets as Coscia will testify that he disrupted the markets by entering and quickly cancelling large orders, said Renato Mariotti, an assistant U.S. attorney.

"He flashed them out and then quickly yanked them back," Mariotti said.

Andrew Vrabel, global head of investigations for CME, testified that it was common for high-speed traders to cancel orders frequently.

But CME, along with US and UK regulators, have fined Coscia and his firm millions of dollars for manipulating commodities markets.

The criminal case is being prosecuted by a specialized unit formed in April 2014 out of the US Attorney's Office for the Northern District of Illinois called the Securities and Commodities Fraud Section.

Since then, there have only been a few other criminal spoofing cases filed.

Perhaps the most well-known case came in April, when the Justice Department and the US Commodity Futures Trading Commission brought parallel criminal and civil spoofing charges against Navinder Sarao, a London-based trader accused of market manipulation that contributed to the May 2010 "flash crash."

Sarao has denied the allegations and is fighting against efforts to have him extradited to stand trial in Chicago.