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The Commodity Futures Trading Commission, the UK Financial Conduct Authority, and the four CME Group exchanges today announced enforcement actions and settlements for disruptive trading practices involving various commodity futures traded on CME Group exchanges and ICE Futures Europe utilizing algorithmic trading by Panther Energy Trading LLC and its manager and sole owner, Michael Coscia, of New Jersey, USA. According to the CFTC, the nature of the disruptive practices – spoofing (or layering, as the FCA calls it) -- occurred from August 8 through October 18, 2011.
The CFTC Order requires Panther and Coscia to pay a fine of USD 1.4 Million and disgorge an identical amount in trading profits, and bans both respondents from trading on any CFTC-registered entity for one year. The FCA's order imposed a fine of GBP 597,993 while the CME imposed a fine of USD 800,000 and disgorgement of USD 1.3 Million. The CME also banned Coscia from trading on CME exchanges for six months.
According to the CFTC, during the relevant time the two respondents utilized an algorithmic program that repeatedly placed small buy or sell orders in the relevant market, followed by the rapid placement and retraction of large, contrary orders. After the initial small orders were executed, the respondents would reverse the process in order to help ensure profits. On its website, the FCA provides an animated example of the relevant disruptive trading practices.
Respondents used 18 futures contracts on four CME Group exchanges to engage in their prohibited conduct and three futures contracts traded on ICE in the UK. The CFTC says that sometimes respondents used their spoofing algorithm hundreds of times in an individual day.
Commissioner Chilton concurred with the CFTC's Complaint and Settlement but argued that the conduct engaged in by respondents deserved a higher fine. According to Commissioner Chilton, utilizing his ordinary colorful language:
"I believe that they type of disruptive trading practices described in the Commission's complaint…warrants the imposition of a much more significant trading ban…to act as a sufficient deterrent to other would-be wrongdoers. …In today's cheetah trading world where identities can be cloaked behind technology, a one year trading ban might simply be a nice sabbatical for a cheetah trader to work on some new algo programs to unleash after the trading ban has expired."
According to the FCA, respondents traded through ICE Futures through an unnamed direct market access provider.
According to the CME Group exchanges' Disgorgement Orders, funds collected will first benefit the Family Farmer and Rancher Protection Fund. This Fund was first established by the CME Group following MF Global's insolvency to further protect customer segregated funds for US family farmers and ranchers who hedge their business on CME Group exchanges.
The CFTC's enforcement action follows the Commission's publication on May 28, 2013 of an Interpretive Guidance on Section 4c(a)(5) of the Commodity Exchange Act which was added as part of Dodd Frank to provide guidance on what constitutes certain prohibited disruptive trading practices: (1) violating bids or offers; (2) demonstrating intentional or reckless disregard for the orderly execution of transactions during the closing period; and (3) is, is of the charter of, or is commonly known in the market as "spoofing." According to the CFTC, a market participant must "…act with some degree of intent, or scienter, beyond recklessness" to engage in the spoofing practices prohibited by this new provision.
This action also follows the week after FINRA announced an examination of high frequency trading firms related to their development and use of trading algorithms and controls surrounding trading technology.
Valuable Lessons Learned:
For more information see:
CFTC Order and Commissioner Chilton's Concurrence:
http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfpantherorder072213.pdf
http://www.cftc.gov/PressRoom/SpeechesTestimony/chiltonstatement072213
Financial Conduct Authority Notice (including animated example):
http://www.fca.org.uk/your-fca/documents/final-notices/2013/michael-coscia
http://www.fca.org.uk/your-fca/documents/final-notices/2013/coscia-appendix-1a
CME Group Exchanges:
http://www.nfa.futures.org/basicnet/CaseInfo.aspx?entityid=0209838&type=reg
CFTC and FCA Guidances on Disruptive Trading Practices:
http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2013-12365a.pdf
http://www.fsa.gov.uk/pubs/newsletters/mw_newsletter33.pdf
The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of July 22, 2013, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.
Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office.
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Gary DeWaal
Katten Muchin Rosenman
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1 (212) 940-6558
CFTC, UK FCA and CME Group Exchanges File Charges and Settle with Proprietary Trading Company and Principal for Spoofing
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