In an attempt to eradicate deceptive computer trading, the first US trader has been found guilty of “spoofing” some of the world’s commodity futures markets.
This week, Michael Coscia was found guilty with intent to defraud other traders by flooding FX, crude oil futures markets, as well as gold, corn and soyabeans, the Financial Times reports.
The sentence that is expected to be passed includes a maximum term of 25 years, a $25,000 fine on each count of commodities fraud, as well as 10 years and $1 million on each count of spoofing.
The FT also explains that spoofing is when orders are placed quickly but are cancelled just as fast which creates the illusion of demand. “While long prohibited by authorities and exchanges, it was explicitly banned under the US Dodd-Frank financial reforms of 2010,” the FT reported.
With the growing electronic trading industry, spoofing has also grown alongside and has replaced face-to-face trading, to some extent. Federal prosecutors involved in the case alleged that Coscia made $1.4 million in the three years of trading at Panther Energy Trading, using an algorithm designed to spoof investors.
The 2011 spoof trading was discovered by officials at CME and Intercontinental Exchange’s London futures market and employees from both, as well as high frequency traders at Citadel and GSA Capital were witnesses at the trial.
A partner with Barnes and Thornburg, Trace Schmeltz, said that this case highlights what spoofing actually is. “We have learned what is considered legitimate price discovery in terms of the size of the trade and how quickly they are being pulled. And if you have an algorithm designed to cancel itself if any part of the trade is touched, it is deemed to be spoofing,” Schmeltz said.
How this trial progresses will determine the future of the second futures markets spoof criminal, Navinder Singh Sarao, a London trader who is fighting extradition in the US.