U.S. to prosecute high-speed trader in first criminal spoofing trial

October 26, 2015 02:18 PM

The U.S. government will square off in a Chicago courtroom on Monday against a high-frequency trader accused of using computer algorithms to move market prices, as prosecutors test their ability to enforce a new "anti-spoofing" law.

Prosecutors said Michael Coscia, the owner of Red Bank, New Jersey-based 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 in October 2014 by the U.S. Attorney's Office for the Northern District of Illinois.

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 $1.6 million through orders he placed on 17 exchanges operated by CME Group Inc. and three operated by London-based ICE Futures Europe, the indictment said.

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.

This will be the first time the U.S. 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 U.S. District Judge Harry D. Leinenweber refused to toss the indictment on those grounds.

The government must convince a jury that Coscia intended to spoof the market.

Trillium General Counsel Michael Friedman said he thought the government could succeed because the trading patterns in the case give a strong "inference of fraudulent intent." Trillium, a trading firm, has also created special software used to detect spoofing.

Unlike some cases, however, this one has no smoking gun emails or tape-recorded conversations that may shed light on Coscia's intentions. And some of the trading by one of the algorithms outlined in the indictment, a buy order in the Euro FX market, occurred at 4:54 a.m.

Chris Gair of the Gair Law Group, who is not involved in the case, said the defense had some strong advantages.

"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," he said. "The challenge for the government to figure out is how to portray this in a way that gets the jury excited."

The Coscia case is being prosecuted by a specialized unit formed in April 2014 out of the U.S. 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 U.S. 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."

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