23 August 2014

Regulators begin HFT crack down on market spoofing algorithms

22 July 2013  |  7366 views  |  1 Stock exchange screen up and down arrows

Regulators on both sides of the Atlantic have levelled their first fines against high frequency traders who deployed computer algorithms to spoof the markets by placing and immediately cancelling bids and offers in futures contracts.

In the US, the Commodity Futures Trading Commission (CFTC) has fined Panther Energy Trading and its principal Michael Coscia $2.8 million and banned the oil trading outfit from for one year for disruptive practices related to trading on the CME's Globex platform over a three month period in 2011.

According to the CFTC, Coscia and Panther would place a relatively small order to sell futures that they did want to execute, which they quickly followed with several large buy orders at successively higher prices that they intended to cancel. By placing the large buy orders, Coscia and Panther sought to give the market the impression that there was significant buying interest, which suggested that prices would soon rise, raising the likelihood that other market participants would buy from the small order Coscia and Panther were then offering to sell.

The watchdog says Coscia and Panther profited to the tune of $1.4 million on the executions of the small orders over the period in question.

David Meister, the CFTC's enforcement director, says: "While forms of algorithmic trading are of course lawful, using a computer program that is written to spoof the market is illegal and will not be tolerated. We will use the Dodd Frank anti-disruptive practices provision against schemes like this one to protect market participants and promote market integrity, particularly in the growing world of electronic trading platforms."

The UK's Financial Conduct Authority has also taken action against Coscia, levelling a £0.9 million charge against him over similar 'layering' abuses on the ICE Futures Europe exchange.

The FCA says the practice made Coscia a profit of $279,920 over a 6 week period at the expense of other market participants - primarily other high frequency traders or traders using algorithmic and/or automated systems.

Tracey McDermott the FCA's director of enforcement and financial crime says: "Mr Coscia was cheating the market and other participants. High Frequency Trading and the use of algorithms are an important and commonplace part of the markets nowadays but in this case these techniques were deliberately designed to abuse the market, undermining its integrity. This is unacceptable, which is why we have taken tough action to punish Coscia and deprive him of any benefit he acquired."

Comments: (1)

Neil Crammond - evoi - london | 23 July, 2013, 12:09

regulators and exchange market supervision depts at exchanges were constantly warned of this "spoofing " pratice yet at the time they decided to do absolutely nothing ! Therefore the end user lost monies and market confidence withered yet the algo spoof client profited from illegal trading !

     Hey ho  a few years later the regulators want a pat on the back ! Perhaps if they did their job properly and at source this would never of festered ; now its opened a can of worms as alot of senior companies have been found guilty . Personally I would like to see an exchange fined for not providing  "fair and orderly markets " .

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