Following the release of “Moneyball,” author Michael Lewis’ book “Flash Boys,” which was published in 2014, the SEC, FBI were forced to take a look deeper into the practice of high-speed trading. In October 2014, the first U.S. federal case brought against high-frequency commodity trader came when Michael Coscia was arrested on allegations of “spoofing.”
The SEC charges
Today saw the charging of Ontario native, Aleksnandr Milrud, by federal prosecutors in New Jersey. Milrud was arrested at a home of his in the Miami area on one count of wire fraud and one count of conspiracy to commit securities fraud. Milrud, 50, was expected to appear before a federal magistrate court in Miami late Tuesday on accusations of manipulating stock prices through a process called “layering” or “spoofing.” In addition to the criminal charges, the Securities and Exchange Commission filed a separate civil case related to his alleged market manipulation.
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When reporting the arrest yesterday, Reuters was unable to determine whether Mr. Milrud was represented by council when he appeared in court.
While many believe that high-speed trading presents numerous firms and trading outfits with an unfair advantage in the market. While that may be the case, the process of “spoofing” is outright illegal. “Spoofing” is the process of creating fake orders to make a stock’s price move before the order is canceled and a purchase or sale is made working in the opposite direction. Prosecutors allege that Milrud employed a network of traders and brokerage companies to place fake orders to move them in the desired direction.
Hotkeys and Chinese traders
Milrud is alleged to have hired software specialists to program “hotkeys” into computers that allowed traders in South Korea and China to make and then cancel orders in just a few keystrokes. He even went out of his way to explain to an offshore broker-dealer that his method was untraceable. Unfortunately, for the accused, said broker-dealer was, for some reason undisclosed, working as a confidential informant of the FBI.
“Milrud’s elaborate efforts to disguise this manipulative trading scheme were ultimately unsuccessful,” said Joseph G. Sansone, co-deputy chief of the SEC’s Market Abuse unit.
This was a small part of a conversation that was recorded between the broker and the accused.
Bloomberg View did an excellent job breaking down the case and trades on Tuesday. That article is available here.