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Regulators find an investment house not too big to prosecute for 'spoof' trades
High-Frequency Trading Firm Panther Energy Fined in 'Spoofing' Case
By Dina El Boghdady
Washington Post
Monday, July 22, 2013
http://www.washingtonpost.com/business/economy/high-frequency-trading-fi...
A high-speed trading firm in New Jersey and its owner agreed to pay $2.8 million to settle federal charges that they used a disruptive market trading practice that was banned by Congress when it passed a major financial overhaul measure three years ago.
The Commodity Futures Trading Commission announced the deal Monday with Panther Energy Trading and Michael J. Coscia, who allegedly used sophisticated computer algorithms to illegally place and quickly cancel bids, a method known as "spoofing." The CFTC action, which awaits court approval, marks the first time that federal authorities have used an enforcement tool granted them by the 2010 Dodd-Frank financial regulation law, which banned spoofing.
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The use of complex algorithms to make trades in the blink of an eye has come to dominate the market, attracting scrutiny from regulators in this country and abroad. The Securities and Exchange Commission and the CFTC have been studying the practices employed for these high-frequency traders. Last week the Financial Industry Regulatory Authority sent letters to nearly a dozen such trading firms, asking for details on the controls they use to keep algorithms from malfunctioning.
Panther and Coscia agreed to pay a $1.4 million fine, return $1.4 million in ill-gotten gains and stop trading for a year as part of the settlement, but they did not admit to wrongdoing. Neither party could be immediately reached for comment.
The CFTC alleges that for nearly three months in 2011, Panther would place a small order to sell futures. It would then place large orders to buy those futures at high prices, giving the impression to the market at large that there was big demand. But the firm would then quickly cancel its buy orders as soon as it sold the contracts it wanted to sell.
"The sequence would quickly repeat, but in reverse," the CFTC said.
CFTC Commissioner Bart Chilton said in a statement that Panther was trying to "fake out" other traders and that he wanted a longer ban on trading for the company and its owner.
"Spoofing sends false signals to markets in order to lure prey and game the system," said Chilton, who coined the term "cheetah" to describe high-frequency traders. "With ultra-fast cheetah technology, false market signals take places within milliseconds. The good news is that regulators around the world are starting to catch up with the cheetah traders and we are shutting them down when they violate the law."
In a related matter, Britain's Financial Conduct Authority imposed a $900,000 penalty as part of an enforcement action against Coscia, the CFTC said.
The CFTC alleges that Panther and Coscia engaged in the illegal activity while trading 18 futures contracts -- including natural gas, corn, and soybeans -- on four exchanges owned by CME Group. The CFTC said CME also has imposed an $800,000 fine and ordered the return of $1.3 million in ill-gotten gains from Panther and Coscia.
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