On November 2, 2015, Law360.com reported that Michael Coscia became the first individual to be convicted for the crime of “spoofing” under the Dodd-Frank Act of 2010. The Dodd-Frank Act amended section 4c(a)(5) of the Commodities Exchange Act, making it unlawful to engage in any trading or practice that “is, is of the character of, or is commonly known to the trade as, ‘spoofing’ (bidding or offering with the intent to cancel the bid or offer before execution).” The Commodity Future Trading Commission (CFTC) published an Interpretive Guidance and Policy Statement that explains spoofing in terms of the intent behind the submission and cancellation of the bids. Improper reasons include: overloading the quotation system, delaying another’s trade execution, creating the appearance of false market depth or creating artificial price movements.
Coscia, the founder of Panther Energy, LLC, allegedly created two computer algorithms that posted orders to the Chicago Mercantile Exchange and ICE Futures Europe with the goal of canceling them before they could be executed. Coscia would place a small order to sell a futures contract and then place a large order to buy the same contract at higher prices, giving the impression of demand, before canceling the buy orders after selling the contracts at his desired price. CFTC Commissioner Bart Chilton referred to this activity as an attempt to “fake out” other traders. Coscia would repeat this pattern sometimes hundreds of times a day for a single contract.
The CFTC’s investigation into Coscia ended with a settlement in 2013 for $2.8 million, which included a $1.4 million fine and $1.4 million disgorgement of the profits from his spoofing activities, as reported in the Washington Post. Coscia also settled with Britain’s Financial Conduct Authority for $900,000.
A little over a year later − in October 2014 − Coscia became the first person indicted under the Dodd-Frank Act’s prohibition on spoofing. Prosecutors said Coscia profited by $1.3 million over three months in what they described as a “classic bait and switch.”
Coscia’s defense team attempted to paint a picture of a highly sophisticated trading strategy that involved high-frequency transactions that occurred “in the blink of an eye.” They explained it was a common strategy to cancel trades that became old, even if old was only a few milliseconds after the bid was entered.
Coscia’s case was watched closely by financial trading firms and regulators, as many observers believed a failure to convict would have been seen as a sign that the anti-spoofing law was unenforceable, as reported in the Chicago Tribune. After a one-week trial, the jury needed only one hour to convict Coscia of all 12 counts of commodities fraud and spoofing.
Commodities and securities traders should be aware of the anti-spoofing provisions in the Dodd-Frank Act, and know that administrative fines and bans represent only one enforcement avenue open to the government.