The jury finding that commodities trader Michael Coscia’s high-frequency trading behavior constituted spoofing will send a trader to prison. It is unclear whether this result provides useful guidance on the limits of allowed high-frequency trading conduct or will chill market activity overall. In either case, expect more Commodity Futures Trading Commission (CFTC) enforcement activity. The Coscia case resulted from the CFTC’s use of its Dodd-Frank authority, a trend which the director of enforcement, Aitan Goelman, has described as just starting (New York City Bar Association, October 16, 2015). Indeed, the CFTC recently initiated another high-frequency spoofing suit against 3Red.
These anti-spoofing cases highlight the differences between the enforcement stance of the CFTC and SEC over disruptive trading practices. SEC standards to address potentially disruptive trading have been anticipated for some time. The SEC’s plans for a new rule focus on operational integrity rather than risks posed by deliberate misconduct. As described by Mary Jo White in an October 20, 2015, speech, the SEC plan is to address “aggressive, destabilizing trading strategies by active proprietary traders in vulnerable market conditions.” This focus on preventing malfunctioning algorithms precipitating another flash crash would only proscribe certain conduct when market conditions met pre-defined vulnerability conditions. At any other time, these rules would not apply, leaving existing fraud-based rules to address trading misconduct under normal market conditions. At the November 2 SIFMA conference, the SEC’s Andrew Ceresney described market-manipulation cases as a priority for the agency and identified a spoofing case that the SEC recently resolved in an administrative proceeding (In the Matter of Briargate Trading, LLC and Eric Oscher, Exchange Act Release No. 76104, Oct. 8, 2015). However, this case did not involve manipulative high-frequency trading. The SEC’s enforcement record provides little guidance on what high-frequency trading practices constitute abuse, manipulation, or spoofing.
In Chairman Timothy Massad’s October 21 speech, the CFTC recently signaled that it too plans to introduce rules to reduce the risk of a flash crash triggered by algorithms going haywire. But the CFTC's use of its separate anti-spoofing authority remain a notable difference between its enforcement stance and that of the SEC.
As the CFTC's enforcement of its anti-spoofing rule expands, the limits of allowed conduct may become more clearly defined. The success of these enforcement actions will hinge on their ability to distinguish between desirable order cancellations associated with market making, and spoofing—defined as “submitting or canceling bids or offers with intent to create artificial price movements upwards or downwards,” 78 Fed. Reg. 31,890, 31,896 (May 28, 2013). Unfortunately, the use of criminal prosecution rather than civil fraud proceedings may delay the publication of written opinions that could clarify the practical application of the CFTC’s rule on the basis of careful economic analysis of the trading behaviors involved.
Keywords: securities litigation, Coscia, spoofing, high-frequency trading, SEC, CFTC