July 13, 2016
On October 1, 2014, Michael Coscia, a registered commodities trader since 1988, and the manager and sole owner of Panther Energy trading LLC, which he formed in 2007, was indicted in the Northern District of Illinois ("NDIll") on 6 Counts of Commodities Fraud and 6 Counts of "Spoofing." This Indictment was the first federal prosecution under the Anti-Spoofing provisions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. United States of America v. Michael Coscia (Indictment, NDIll, October 1, 2014).
SIDE BAR: The Spoofing Counts: Title 7, United States Code, Sections:
(5) Disruptive practices. It shall be unlawful for any person to engage in any trading, practice, or conduct on or subject to the rules of a registered entity that-
(A) violates bids or offers;
(B) demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or
(C) is, is of the character of, or is commonly known to the trade as, "spoofing" (bidding or offering with the intent to cancel the bid or offer before execution).
(a) Felonies generallyIt shall be a felony punishable by a fine of not more than $1,000,000 or imprisonment for not more than 10 years, or both, together with the costs of prosecution, for:
(2) Any person to manipulate or attempt to manipulate the price of any commodity in interstate commerce, or for future delivery on or subject to the rules of any registered entity, or of any swap, or to corner or attempt to corner any such commodity or knowingly to deliver or cause to be delivered for transmission through the mails or interstate commerce by telegraph, telephone, wireless, or other means of communication false or misleading or knowingly inaccurate reports concerning crop or market information or conditions that affect or tend to affect the price of any commodity in interstate commerce, or knowingly to violate the provisions of section 6, section 6b, subsections (a) through (e) of subsection  6c, section 6h, section 6o(1), or section 23 of this title.
Coscia faced on each of the Commodities Fraud counts up to 25 years in prison and a $250,000 fine; and on each of the Spoofing counts he faced up to 10 years in prison and a $1 million fine.
According to the indictment, high-frequency trading is a form of automated trading that uses computer algorithms for decision-making and placing a high volume of trading orders, quotes, or cancelation of orders in milliseconds. Coscia designed two computer programs he allegedly used in 17 different CME Group markets and three different markets on the London-based ICE Futures Europe exchange, including gold, soybean meal, soybean oil, high-grade copper, Euro FX and Pounds FX currency futures, to implement his fraudulent strategy. It was illegal for traders to place orders in the form of "bids" to buy or "offers" to sell a futures contract with the intent to cancel the bid or offer before execution.
Between August and October 2011, Coscia allegedly defrauded participants in the CME Group and ICE Futures Europe markets. In August 2011, Coscia began a high-frequency trading strategy in which he entered large-volume orders that he intended to immediately cancel before they could filled by other traders, the indictment alleges.
Coscia devised this strategy to create a false impression regarding the number of contracts available in the market, and to fraudulently induce other market participants to react to the deceptive market information he created, the indictment states. His strategy moved the markets in a direction favorable to him, enabling him to purchase contracts at prices lower than, or sell contracts at prices higher than, the prices available in the market before he entered and canceled his large-volume orders, it adds. Coscia then allegedly repeated this strategy in the opposite direction to immediately obtain a profit by buying futures contracts at a lower price than he paid for them, or by selling contracts at a higher price than he paid for them. Each such trade allegedly occurred in a matter of milliseconds. As a result of the aggregate of those fraudulent high-frequency trades, Coscia illegally profited approximately $1,592,867 over approximately three months, the indictment alleges.
As part of the scheme, Coscia's trading programs looked for market conditions such as price stability, low volume at the best prices, and a narrow difference between the prices at which prospective purchasers were willing to buy and prospective sellers were willing to sell because his allegedly fraudulent trading strategy worked best under these conditions. His trading programs sometimes placed a "ping order" of one contract to test the market and ensure that conditions would allow his strategy to work well.
Coscia allegedly designed his trading programs to place a "trade order" on one side of the market, intending that the trade order be filled. He profited from his fraudulent strategy by filling the "trade order," the charges allege.
He also designed his programs to place several layers of "quote orders" on the other side of the market from his trade orders ― either to buy contracts at a price higher than the prevailing offer, or to sell contracts at a price lower than the prevailing bid ― to create the illusion of market interest. The quote orders would typically be the largest orders in the market within three ticks (the minimum price increment at which a futures contract could trade) of the best bid or offer price, usually doubling or tripling the total quantity of contracts within the best bid or offer price.
The indictment alleges that Coscia designed his programs to cancel the quote orders within a fraction of a second automatically, without regard to market conditions, even if the market moved in a direction favorable to the quote orders. He programmed the quote orders to cancel because he did not intend for them to be filled, but instead intended to trick other traders into reacting to the false price and volume information, it adds. Further, Coscia designed his programs to cancel all fraudulent and misleading quote orders immediately if any of them were even partially filled, because he intended them only to trick other traders into reacting to what appeared to be a substantial change in the market.
After Coscia filled his trade order through the use of fraudulent and misleading quote orders, he immediately entered a second trade order on the other side of the market and repeated his steps with misleading quote orders, causing the second trade order to be filled. As a result, Coscia allegedly profited on the difference in price between the first and second trade orders.
The indictment details an example through trades that Coscia placed milliseconds apart in the Euro FX market during the early morning on Sept. 1, 2011. By entering large orders that he intended to cancel at the time he placed them, and caused to be canceled before other traders could fill them, Coscia made a profit by buying 14 contracts at 14288 ticks and selling them at 14289 ticks less than one second later.
After deliberating for about one-hour, on November 3, 2015, a federal jury convicted Coscia on all 12 Counts.
On July 13, 2016, Coscia was sentenced to three year in prison plus two years of supervised release.
READ the FULL TEXT Indictment