A day after Halloween, federal prosecutors spooked traders nationwide. In the first criminal prosecution of its kind, Michael Coscia was charged with spoofing. ((U.S.Attorney’s Office, High-Frequency Trader Indicted for Manipulating Commodities Futures Markets in First Federal Prosecution for Spoofing, FBI (Oct. 2, 2014) http://www.fbi.gov/chicago/press-releases/2014/high-frequency-trader-indicted-for-manipulating-commodities-futures-markets-in-first-federal-prosecution-for-spoofing.)) The indictment claims that he manipulated the futures market through two computer programs that he designed. ((Id.)) Mr. Coscia is a high frequency trader, and the prosecution comes at a time when authorities seem to be increasingly worried about the practice. ((Marcus Christian, DOJ’s 1st Anti-Spoofing Prosecution Reflects 2 Trends, Law360 (Oct. 23, 2014, 10:19AM), http://www.law360.com/articles/589286/doj-s-1st-anti-spoofing-prosecution-reflects-2-trends.)) High frequency trades are done by computer algorithms and occur within the matter of fractions of a second. If the prosecution is successful, traders may have a legitimate reason to worry about their conduct and the DOJ will have created helpful precedent for future prosecutions.
Michael Coscia ran a high frequency trading firm out of New Jersey. ((U.S. Attorney’s Office, supra note 1.)) He designed computer programs that would automatically initiate trades in the matter of instants. These algorithms have the ability to respond to the market, and as it may seem, to manipulate it. In this particular case, Coscia was interested in commodities futures and found a way to make the market operate in his favor.
Spoofing is defined under the Dodd-Frank Act as “bidding or offering with the intent to cancel the bid or offer before execution.” ((7 U.S.C. § 6(c) (2014).)) What Coscia’s algorithm would do is place orders on commodities in order to influence the price and then remove the orders once other buyers had reacted to the increase. Coscia essentially found a way in which his program could affect market behavior in a favorable way without actually committing to his bids. Each time, Coscia would make small offers on a future. ((Christian, supra note 3.)) He would then make significant bids on the other side of the trade. ((Id.)) The market would react within milliseconds as Coscia was driving up the price. He would then pull his bids once his initial order was filled. ((Id.)) The computer system was using bids that it intended to later withdraw in order to make the market respond in a particular fashion.
What Coscia is charged with only made him between $60 and $560 a deal, but over the course of his conduct he made about $1.6 million. ((Id.)) Even before this indictment, however, Coscia has paid far more than he earned. The criminal charge comes at the heels of multiple actions brought by administrative agencies, at the end of which Coscia paid $3.7 million in fines to the U.S. Commodity Futures Trading Commission, the Federal Trade Commission, the UK Financial Conduct Authority and the CME Group. ((Id.))
Coscia’s two computer programs did this type of maneuver repeatedly. The DOJ, however, has only decided to prosecute 6 counts; worried that explaining more to the jury may cause excess boredom. ((Peter J. Henning, ‘Spoofing,’ a New Crime With a Catchy Name, N.Y. Tiimes (Oct. 6, 2014, 12:39 PM), http://dealbook.nytimes.com/2014/10/06/a-new-crime-with-a-catchy-name-spoofing/.)) A disinterested jury, however, is not the only hurdle facing prosecutors. In order for a conviction, they will have to show intent, which will be difficult since Coscia was not personally involved in making the trades. ((Id.)) Sympathy will also not be on the prosecution’s side, since the only entities being defrauded were other high frequency trading firms. ((Id.)) If Coscia is convicted, however, he could face significant fines and jail time, which would hopefully deter similar behavior in the future. With significant penalties available, and potential precedent for future cases, the financial community might just be properly spooked.