As previously reported in "UPDATE: 1st Criminal Prosecution Of Layering And Spoofing Hits HFT Sphere" (BrokeAndBroker.com Blog, January 13, 2015), the first purported criminal case was brought involving High Frequency Trading and layering/spoofing. United States of America v. Aleksandr Milrud (Complaint, DNJ, 15-7001, January 13, 2015). In a separate action, the Securities and Exchange Commission ("SEC") filed a civil Complaint charging Milrud with violating and aiding and abetting violations of anti-fraud provisions of federal securities laws and the SEC's antifraud rule, and with liability for the conduct of the traders under his management. Also see Securities and Exchange Commission, Plaintiff, v. Aleksandr Milrud, Defendant (Complaint, 15-CV-00237,DNJ, January 13, 2015).
SEC Briargate/Oscher OIP
On Oct. 8, 2015, the SEC filed an Order Instituting Proceedings ("OIP") alleging that unregistered proprietary trading firm Briargate Trading, LLC and Eric Oscher (a Briargate principal) had engaged in spoofing and, as such, had manipulated the market. As more fully set forth in the OIP "Summary"
1. Briargate, an spoofing unregistered proprietary trading firm based in New York, New York, and Oscher, one of its principals, utilized a market manipulation strategy known as "spoofing" as one of its trading strategies. In a spoofing scheme, a trader places non-bona fide orders - spoofs - that the trader does not intend to have executed, on one side of the market. The non-bona fide buy or sell orders create a false appearance of buy or sell interest in the security, which often results in a price change. The trader who placed the non-bona fide orders then places bona fide orders on the opposite side of the market for the same stock, in an attempt to take advantage of any price change resulting from the false appearance of buy or sell interest. Immediately after the bona fide orders are executed, the trader cancels the open, non-bona fide orders.
2. Respondents' spoofing scheme focused on trading in securities that were listed on the New York Stock Exchange ("NYSE"). From October 2011 through September 2012 (the "Relevant Period"), Oscher used his Briargate account to place a series of large, non-bona fide orders on the NYSE prior to the opening of trading on the NYSE. Once news of Briargate's non bona fide orders was disseminated to the market, this information impacted the market's perception of the demand for the stock and often the price of the stock. Next, Briargate also sent orders in the same security - but on the opposite side of the market - to other exchanges that opened before the NYSE. Then prior to the NYSE opening, Oscher cancelled the non-bona fide NYSE orders and Briargate profitably unwound the positions it had acquired on other exchanges. Through this conduct, Respondents derived approximately $525,000 in profits during the Relevant Period.
3. Through this conduct, Briargate and Oscher violated Section 17(a)(1) and 17(a)(3) of the Securities Act and Sections 9(a)(2) and 10(b) of the Exchange Act and Rule 10b-5 thereunder.
- The Imbalance Messages Begin: At 8:30 a.m., the NYSE sent the first Imbalance Message for stocks expected to open with an imbalance (buy or sell). The NYSE continued to send Imbalance Messages with increasing frequency until the open of each stock; by 9:20 a.m., Imbalance Messages were sent every 15 seconds.
- The Entry of the Non-Bona Fide Orders: Between 8:30 a.m. and the NYSE open, Oscher typically placed non-bona fide orders on the NYSE in securities that the Imbalance Messages identified as having large order imbalances. Oscher's non-bona fide orders were reflected in the next Imbalance Message for that stock. Oscher's non-bona fide orders often impacted the price of the stock on other exchanges. For example, for a NYSE-listed stock with a sell imbalance, Oscher's non-bona fide buy orders reduced the sell imbalance and increased the price of that stock on other exchanges.
- Briargate Obtains Positions on Other Exchanges: After Oscher placed spoof orders for a stock on the NYSE (but before cancelling them); Briargate also traded the same stock on the opposite side of the market on other exchanges. For example, if Oscher placed a non-bona fide buy order, Briargate generally sold the same stock short on other exchanges. Doing so often allowed Briargate and Oscher to take advantage of any price change on other exchanges following Oscher's non-bona fide orders on the NYSE.
- The Cancellation of the Non-Bona Fide Orders: Next, Oscher cancelled the non-bona fide orders on the NYSE prior to the open. This had the effect of changing the imbalance minutes before the stock opened on the NYSE and typically reversed the effect the non-bona fide orders had on the stock's price.
- Briargate Unwinds its Position on Other Exchanges: To complete the spoofing scheme, Briargate's last step was to liquidate its position in that same stock on other exchanges. Briargate was typically flat by the end of the stock's opening auction on the NYSE.