High-frequency trader convicted in first US 'spoofing' case

CHICAGO (REUTERS) - A US jury on Tuesday (Nov 3) convicted high-frequency trader Michael Coscia of commodities fraud and "spoofing" in the US government's first criminal prosecution of the banned trading practice.

The verdict may energise prosecutors to pursue market manipulation cases and spur some high-speed traders to review their "spoofing" strategies, in which orders are sometimes executed or cancelled within milliseconds after they are entered.

"This is the clarity that people have been looking for - what exactly is spoofing, what defines it," said Mr Trace Schmeltz, an attorney specialising in white-collar crime at law firm Barnes & Thornburg who was not involved in the case.

Coscia's prosecution was the first under an anti-spoofing provision that was added to the Commodity Exchange Act by the 2010 Dodd-Frank financial reform.

In April, the US Justice Department and the US Commodity Futures Trading Commission brought 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.

Coscia, owner of Panther Energy Trading, was accused of entering large orders into futures markets in 2011 that he never intended to execute. His goal, prosecutors said, was to lure other traders to markets by creating an illusion of demand so that he could make money on smaller trades, a practice known as "spoofing". Coscia, who took the stand in his own defence, denied wrongdoing.

Prosecutors said he illegally earned US$1.4 million (S$1.95 million) in fewer than three months in 2011 through spoofing.

The jury in Chicago convicted him on six counts of commodities fraud and six counts of spoofing, all of the charges he had faced, after deliberating for about an hour.

Each count of commodities fraud carries a maximum sentence of 25 years in prison and a US$250,000 fine. Each count of spoofing carries a maximum sentence of 10 years in prison and a US$1 million fine.

Coscia is set to be sentenced next year.

The verdict came as futures traders and executives from around the world gathered in Chicago for an annual industry conference.

"Investors are better off when spoofers who prey on high-frequency traders are brought to justice," said Mr Bill Harts, chief of the Modern Markets Initiative, a group representing high-frequency and algorithmic traders.

Coscia's firm had fewer than 10 employees. However, he "entered more large orders than anyone else in the world" in nearly a dozen CME Group markets ranging from corn and soybeans to gold after he began using two algorithmic trading programs in August 2011, prosecutors said during the trial.