U.S. criminal prosecutors appear to be getting tough with high frequency trading, as a firm has been hit with criminal charges for manipulating prices in futures markets, court documents reveal.
This is the first criminal case to be brought under new Commodity Futures Trading Commission rules that cover market manipulation, according to a New York Times Dealbook article, which first reported on the issue.
Criminal charges against Michael Coscia
A federal grand jury charged Panther Energy Trading founder Michael Coscia with six counts of commodities fraud and six counts of “spoofing,” according to the report. Coscia is said to have profited to the tune of $1.6 million off his trades.
Spoofing is the illegal practices of placing then canceling orders into the exchange with the goal to influence the price of a stock or commodity future. Each exchange primarily utilizes computer-driven “market makers” whose software operations and methods are generally known by sophisticated high frequency trading firms. By sending a massive flood of orders to the exchange and then canceling the orders, certain market making software configurations have an “electronic eye” that monitors such correlated market behavior and is known to adjust the bid-ask prices of the commodities it trades. Although the official report did not indicate it, such “spoofing” was said to be involved in the flash crash of 2010.
Spoofing along with other tactics such as repeated orders, often occurring on a millisecond basis, can push past the known liquidity limits of that market are methods that can be used to move a market in one direction or another.
“What Panther did, is common in the markets,” high frequency trading reform advocate Eric Hunsader said to ValueWalk, indicating such behavior could happen on a daily basis.
Charges highlight Coscia’s firm entering buy order in a European currency market
The charges against Coscia highlight one of many issues that took place in September 2011 where the firm entered a below market buy order in a European currency market, according to the report. In the blink of an eye, approximately 11 milliseconds later, the firm entered three large sell orders, likely beyond the liquidity limits the market makers had set as normalized market behavior, and market prices fell, and he purchased the currency at a lower price, then canceling the large sell orders. The firm repeated the scheme in the opposite direction, entering a sell orders at a price higher than any bid in the market, and then entering buy orders intended to drive the price upward, the indictment says.
“Traders and investors deserve a level playing field, and when the field is tilted by market manipulators, regardless of their speed or sophistication, we will prosecute criminal violations to help ensure fairness and restore market integrity,” Zachary T. Fardon, the United States attorney in Chicago, was quoted as saying in a statement.
“It seems the faster trading goes, the slower the regulators are at uncovering manipulation,” Hunsader said.