In a surprising regulatory action, the CFTC fined Panther Energy Trading LLC for a manipulative high frequency trading activity known as spoofing. The one-man trading firm, based in Red Bank, New Jersey, apparently profited about $1.4 million in only two months of activity. Michael Coscia, the firm’s owner, will be made to pay fines of $2.8 million in the U.S. as well as $900,000 in the U.K. and has been banned from CFTC trading for one year.
The definition of “spoofing” according to the CFTC:
In the view of the Commission, a “spoofing” violation requires that a person intend to cancel a bid or offer before execution. Orders, modifications, and cancellations will not be classified as “spoofing” if they were submitted as part of a legitimate, good-faith attempt to consummate a trade. Thus, the legitimate, good-faith cancellation of partially filled orders is not a violation. When distinguishing between legitimate trading involving partial executions and “spoofing” behavior, the Commission will evaluate the market context, the person’s pattern of trading activity (including fill characteristics), and other relevant facts and circumstances.
“Spoofing” also includes:
(i) submitting or cancelling bids or offers to overload the quotation system of a registered entity;
(ii) submitting or cancelling bids or offers to delay another person’s execution of trades; and
(iii) submitting or cancelling multiple bids or offers to create an appearance of false market depth.However, the “spoofing” provision is not intended to cover non-executable market communications such as requests for quotes and other authorized pre-trade communications.
A far simpler explanation of spoofing, in a graphic visualization, compliments of the Wall Street Journal and Zerohedge:
The good folks over at Nanex have once again come through to locate precise times when Coscia’s algorithm was running. Here is one look from them and plenty more can be found ontheir site.
Finally, the regulatory body in the U.K. involved in the Panther trading punishment, the Financial Conduct Authority, released this document explaining the manipulative algorithm operating in Brent crude futures in London.
Spoofing FCA
On Thursday shares of Whirlpool went on a flash-rise-then-crash, spiking from about $128 to over $134. The move of around 5% took only 2 seconds and had participation from every exchange, something not always seen in these market anomalies. Nanex has put together a great collection of charts showing precisely how HFT is responsible for these moves by abusing special order types. There are too many charts to include here but are certainly worth a look for anyone that doubts that manipulative high frequency trading practices are behind these dramatic swings.
Also on Thursday, the stock of Facebook saw very heavy trading volumes after announcing earnings. Apparently all the HFT activity slowed down the system as one exchange and an untold number of dark pools fell behind. The chart below from Nanex shows the late trades.
A really fascinating collection of data shows the most active times during the day for trading in the e-mini S&P future contract. As you can see, and would expect, the opening and closing of regular market hours are the busiest, as well as the times of economic data releases in the morning and Fed communication in the afternoon. Interestingly, this data was mined back to 2003, however no large activity was found until after 2007. That year of course was the birth of HFT with the passing of Regulation NMS. Of special note is the rapid growth of trading that occurs in the final second before 4 PM.
