A jury on Tuesday convicted high-frequency trader Michael Coscia of commodities fraud and "spoofing," in the U.S. government's first criminal prosecution of the banned trading practice. The verdict may energize prosecutors to pursue market manipulation cases and spur some high-speed traders to review their strategies, in which orders are sometimes executed or canceled within milliseconds after they are entered.
"This is the clarity that people have been looking for--what exactly is spoofing, what defines it," said Trace Schmeltz, an attorney specializing in white-collar crime at law firm Barnes & Thornburg who was not involved in the case.
Coscia, owner of New Jersey-based 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.
Steven Peikin, a lawyer for Coscia, said he was disappointed by the verdict.
"We believe this case presents many novel and complex issues, and Mr. Coscia intends to pursue all of his legal options," Peikin said.
Coscia took the stand in his own defense to deny wrongdoing. He testified that he intended to trade every order that he entered.
Prosecutors said he illegally earned $1.4 million in fewer than three months in 2011 through spoofing.
"The defendant's trading activities disrupted the markets in his favor and against legitimate traders and investors," said Zachary Fardon, U.S. Attorney for the Northern District of Illinois.
The trial spanned seven days, but the jury in Chicago convicted Coscia on six counts of commodities fraud and six counts of spoofing, all of the charges he had faced, after deliberating for just about an hour.
Each count of commodities fraud carries a maximum sentence of 25 years in prison and a $250,000 fine. Each count of spoofing carries a maximum sentence of 10 years in prison and a $1 million fine. A sentencing hearing was set for 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 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 Inc markets ranging from corn and soybeans to gold after he began using two algorithmic trading programs in August 2011, prosecutors said during the trial.
Coscia also traded in markets run by Intercontinental Exchange
CME and ICE declined to comment on the verdict.
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 U.S. Justice Department and the U.S. 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's case is U.S. v. Coscia, 14-cr-00551, U.S. District Court, Northern District of Illinois. (Reporting by Tom Polansek; Editing by Cynthia Osterman, Bernard Orr and Ken Wills)